Secretary Of State For Business, Innovation And Skills v Knight (Contract of Employment)

A sole shareholder and managing director may be an employee of the company. The issue is one of fact, including whether an apparent contract of employment remained in force when the statutory entitlement arose.

An employee's decision not to demand salary while the company is in financial difficulty does not necessarily vary or discharge the contract. It may instead be a decision not to enforce an existing contractual entitlement. The tribunal must decide which inference the evidence supports. A challenge to that factual conclusion on perversity grounds must be overwhelmingly established.

The respondent was the managing director and sole shareholder of an insolvent company. She worked for it from its inception until it ceased trading. Although an employment contract provided for salary, she received no salary during the final two years because she sought to keep the company afloat and permit payments to other employees and suppliers.

The Employment Tribunal at Watford held that she remained an employee and was entitled to a redundancy payment from the Insolvency Service under section 166 of the Employment Rights Act 1996. The Secretary of State appealed, contending that the unpaid period had ended or varied the employment contract, removed consideration and mutuality, and made the Tribunal's conclusion perverse.

1. Appeal dismissed. The Employment Judge addressed the respondent's status at the relevant time: the date when the claimed obligation arose. Reading the Tribunal's reasons as a whole, it found that she remained an employee during the final two years and at insolvency.
2. The fact that she did not require the company to pay her salary did not compel a finding that the parties had varied or discharged her employment contract. The Tribunal was entitled to find that she had retained her contractual entitlement but chose not to enforce it in order to keep the company trading. Her use of the word “forfeited” did not require a different conclusion.
3. Whether an ostensible employment contract has been varied, discharged, or continues to subsist depends on the factual conclusions properly drawn from the parties' conduct. A controlling shareholding does not itself prevent an employment relationship.
4. On the findings made, there was no absence of mutuality or consideration. The Tribunal had found a continuing entitlement to salary. The EAT also observed that contractual consideration from an employer need not invariably be monetary, although that observation was unnecessary to the decision.
5. The issue was essentially factual. It was open to the Employment Judge to prefer the inference that the respondent had temporarily forgone enforcement of salary over the inference that her contract had ended. Perversity was not established, let alone overwhelmingly established.

• Employment Appeal Tribunal: appeal dismissed; the Employment Tribunal's finding that the respondent was an employee was upheld.
• Employment Tribunal at Watford: judgment sent to the parties on 23 October 2012. It held that the respondent was an employee of the insolvent company and entitled to a redundancy payment under section 166 of the Employment Rights Act 1996.