Secretary of State for Business, Enterprise & Regulatory Reform v Neufeld & Anor

A controlling shareholder and director may be an employee of the company under a contract of employment. Corporate control is distinct from the individual’s control as shareholder or director, so it does not prevent the control condition of employment from being met.

The tribunal must decide whether the asserted contract is genuine and, if so, whether it is truly a contract of employment. The parties’ conduct may show sham, variation or discharge. Once a genuine employment contract is established, share control, capital investment, loans, personal guarantees and the prospect of profit will ordinarily be irrelevant to employee status.

Two appeals concerned claims under Part XII of the Employment Rights Act 1996 following the insolvency of companies controlled by the claimants.

Mr Neufeld held 90% of the shares and was a director of A & N Communications in Print Ltd. The Employment Appeal Tribunal allowed his appeal from the employment judge’s dismissal of his claim: UKEAT/0177/07/JOJ. Mr Howe was sole shareholder and director of Track Records Music Ltd. The employment judge upheld his redundancy claim, and the Employment Appeal Tribunal dismissed the Secretary of State’s appeal while granting permission to appeal: UKEATPTA/0042/08/LA.

The common issue was whether a controlling shareholder and director can be an employee, and what approach determines that question.

1. Both appeals were dismissed. Mr Neufeld and Mr Howe were employees of their respective insolvent companies for the purposes of Part XII of the Employment Rights Act 1996.

2. There is no rule preventing a shareholder and director, even one with total control of a company, from entering into a contract of employment with it. The necessary control is exercised by the separate corporate person. The employee’s practical ability to prevent dismissal through shareholder control does not disqualify him from employee status. This follows from Lee v Lee’s Air Farming Ltd, and the rejection in Secretary of State for Trade and Industry v Bottrill of the contrary reasoning in Buchan.

3. Employee status remains a question of fact. The tribunal may need to decide first whether the asserted contract is genuine or a sham. If it is genuine, it must decide whether it is a contract of employment rather than, for example, a contract for services. In an informal or unwritten arrangement, the parties’ actual conduct may be necessary both to establish the terms and to determine whether the contract remained in force at insolvency.

4. The employee bears the burden of proving the contract. A written agreement may not alone suffice, but the absence of writing is not decisive where the conduct convincingly establishes employment. Conduct may show that a purported agreement was a sham, was varied, or was impliedly discharged.

5. Control through shareholding forms part of the factual setting but is not ordinarily of special relevance once the existence and character of the contract are established. Personal guarantees, loans, invested capital and the prospect of profit are ordinary acts of an owner and do not show that the owner cannot also be an employee. The employment judge in Mr Neufeld’s case therefore erred by treating such matters as decisive. The judge in Mr Howe’s case reached the correct result.

• Court of Appeal (Civil Division): dismissed the Secretary of State’s two appeals: [2009] EWCA Civ 280.
• Employment Appeal Tribunal: in Mr Neufeld’s case, allowed his appeal and held that he was an employee: UKEAT/0177/07/JOJ. In Mr Howe’s case, dismissed the Secretary of State’s appeal and granted permission to appeal: UKEATPTA/0042/08/LA.
• Employment Tribunals: dismissed Mr Neufeld’s claim but upheld Mr Howe’s claim for a statutory redundancy payment.