Secretary of State for Business and Trade v V Karpavicius (Debarred) & Anor

A controlling shareholder may also be an employee of the company. Control of the company does not by itself prevent a contract of employment, and will ordinarily be irrelevant once a genuine employment contract is established. However, it is wrong to treat control as necessarily irrelevant in every case.

Where the alleged contract is unwritten, the individual’s control may form part of the factual backdrop when assessing the actual arrangements, the parties’ conduct, services and remuneration. A tribunal must apply the nuanced guidance in [2009] EWCA Civ 280, rather than disregard shareholding and director’s loans categorically.

The claimant was the sole director and shareholder of a company which entered creditors’ voluntary liquidation. He claimed a statutory redundancy payment, asserting that he had worked under an oral contract of employment. The Employment Tribunal dismissed his other monetary claims as out of time, but held that he was an employee and awarded a redundancy payment.

The Secretary of State appealed on the sole live issue of employee status. The central question was whether the tribunal had erred by holding that the claimant’s complete control of the company, director’s loans and dividends were irrelevant to that assessment.

1. Appeal allowed. The Employment Tribunal misdirected itself by treating the claimant’s status as sole shareholder with complete control of the company as wholly irrelevant to whether he was an employee.

2. Under section 230(1) of the Employment Rights Act 1996, the issue was whether the claimant had entered into or worked under a contract of employment. Secretary of State for Business, Enterprise and Regulatory Reform v Neufeld and Howe [2009] EWCA Civ 280 establishes that a controlling shareholding does not itself negate the necessary element of control in an employment contract. Nor may it alone justify a finding that no employment contract existed.

3. However, the Court of Appeal’s guidance does not make ownership control invariably irrelevant. It may provide the factual backdrop against which the alleged contract and the parties’ conduct must be evaluated. This may be particularly significant where, as here, there was no written contract and the tribunal must infer the agreement and its content from the actual arrangements.

4. The tribunal’s unqualified statements that complete shareholding control, director’s loans and dividends were irrelevant failed to capture that distinction. The error could have affected its evaluation of the oral agreement, irregular payment despite payslips, lack of a regular salary, absence of a written contract, and dividends. The EAT could not conclude that a correct direction would inevitably have produced the same result.

5. The redundancy-payment issue was remitted for fresh determination by a different Employment Judge. The tribunal’s dismissal of the other claims, and its conclusions on effective date of termination and time if employee status is established, stand.

• Employment Appeal Tribunal: appeal allowed. The employee-status finding and consequential redundancy-payment award were set aside and remitted for a fresh hearing before a different Employment Judge.
• Employment Tribunal: held that the claimant was an employee, awarded a statutory redundancy payment of £1,322.15, and dismissed claims for wages, holiday pay and notice pay as out of time.