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

The Court of Appeal dismissed the Secretary of State's appeals. It held that a controlling shareholder and director of a trading company can in principle be an "employee" of that company for the purposes of Part XII of the Employment Rights Act 1996 (notably section 182), and that the correct two-stage approach is first to inquire whether the putative contract is genuine (not a sham) and, if genuine, whether its terms and the parties' conduct show it to be a contract of employment. The court rejected the proposition that control, shareholding, guarantees or loans will ordinarily prevent employee status; such factors are relevant mainly to whether the contract is a sham or whether conduct is inconsistent with an employment contract.

This appeal concerned two claims for payments under Part XII of the Employment Rights Act 1996 arising from employer insolvency: (i) Richard Neufeld's claim for redundancy, notice and holiday pay from A & N Communications in Print Ltd and (ii) Keith Howe's claim for a statutory redundancy payment from Track Records Music Limited. Both claimants were directors and controlling shareholders of the companies alleged to be their employers.

The Employment Judges had reached different results: in Neufeld the employment judge found the claimant was not an employee, emphasising his 90% shareholding, personal guarantees and loans; the Employment Appeal Tribunal (EAT) reversed that decision and found Neufeld to be an employee. In Howe the employment judge found the claimant an employee and the EAT dismissed the Secretary of State's appeal. The Secretary of State appealed both EAT decisions to the Court of Appeal.

Nature of the relief sought: statutory payments arising on employer insolvency under Part XII (section 182) of the Employment Rights Act 1996.

Issues framed:

• Whether a controlling shareholder/director can be an "employee" of his company for the purposes of Part XII of the ERA;
• What approach tribunals should adopt when deciding employee status in such cases, including the relevance of shareholding, guarantees, loans and the absence of a written contract;
• Whether the employment judges had erred in law in the two cases under appeal.

Court's reasoning (concise): The court reviewed the authorities (notably Lee v Lee's Air Farming Ltd and Secretary of State for Trade and Industry v Bottrill) and confirmed that corporate personality means a controlling shareholder/director can enter into a genuine contract of employment with his company. The correct approach is twofold: (1) determine whether the putative contract is genuine or a sham (the claimant bears the burden of proving an employment contract exists); (2) if genuine, determine whether the contract's terms and the parties' conduct satisfy the tests for a contract of employment (control, mutual obligations etc.). Ordinary indicia of ownership such as shareholdings, guarantees, loans, investment, or potential to benefit from company success are typically irrelevant to the classification of the contract unless they bear upon sham or inconsistent conduct. The employment judge in Neufeld had given undue weight to guarantees, loans and majority shareholding; the EAT was right to reverse. In Howe the employment judge's decision was correct and the EAT properly dismissed the Secretary of State's appeal.

The Court of Appeal therefore dismissed both appeals, clarified the correct principles and emphasised careful factual inquiry into contractual reality and conduct.

Appeals dismissed. The court held that a controlling shareholder and director can be an employee of his company; tribunals must first decide whether any purported contract is genuine (not a sham) and, if genuine, whether its terms and the parties' conduct establish a contract of employment. Ordinary features of ownership (shareholding, guarantees, loans, capital investment) do not of themselves preclude employee status and should not be given determinative weight unless they bear on sham or inconsistent performance of the contract. Applying these principles the EAT was right to find Neufeld an employee and to uphold the decision in Howe.

Appeals from the Employment Appeal Tribunal to the Court of Appeal (appeals arising from decisions of His Honour Judge McMullen QC and Bean J). Case references before the Court of Appeal: [2009] EWCA Civ 280 (on appeal from EAT decisions UKEAT/0177/07/JOJ and UKEATPTA/0042/08/LA).