In its recent decision in Secretary of State for Business, Innovation and Skills v Knight UKEAT/0073/13, the EAT held that a managing director and sole shareholder in a company that had ceased trading in 2011 due to insolvency was entitled to a redundancy payment from the National Insurance Fund, despite having not been paid for two years.
Mrs Knight was the sole shareholder in Receptors Security Systems (UK) Ltd (RSS) and was also its managing director. Mrs Knight and RSS entered into a contract of employment shortly after RSS started trading in 1991. The contract was never formally executed but provided for working hours from 9am to 5.30pm Monday to Friday and an annual salary of £20,000 plus discretionary bonuses.
Mrs Knight consistently worked longer hours and received less salary than she was entitled to under the terms of her employment contract. She only took a salary when the business was "operating satisfactorily". As a result of this, and in an effort to keep RSS afloat, Mrs Knight did not receive a salary at all in the last two years of trading. However, Mrs Knight paid tax and National Insurance contributions on any pay that she did receive. RSS ceased trading due to insolvency in 2011 and Mrs Knight claimed a statutory redundancy payment from the Insolvency Service.
Employment tribunal decision
The tribunal found that Mrs Knight was in fact an employee of RSS. As such, regardless of how often or how much she had been paid, she was entitled to a redundancy payment from the National Insurance Fund. BIS appealed.
The appeal was dismissed by the EAT, which agreed with the tribunal that Mrs Knight was an employee despite the fact she had not received any pay for two years. BIS had argued that when Mrs Knight forfeited her entitlement to pay, she had agreed to a variation to her contract that had ended her employee status. The EAT rejected this argument and held that foregoing an entitlement to pay was different from agreeing that no salary was payable. The EAT also rejected BIS' arguments that there was a lack of consideration and mutuality in the last two years of trading, which meant that there was no employment contract at all. According to the EAT, there was no lack of consideration or mutuality – money was not the only form of consideration.
This decision could have wider application than purely the rights of employees in an insolvency situation and could be used by employees who have agreed to forego salary to claim various employment rights. It is unlikely that it could be used by others, such as unpaid interns or charity volunteers, to argue that they have employment status and therefore employment rights because it is normally clear that they have no right to pay and no obligation to work.
In a further development in relation to employment status since this case was reported, the Supreme Court has decided this week that LLP members are protected by the whistleblowing legislation. In Clyde & Co LLP and another v Bates van Winkelhof, the Supreme Court held that a member of a limited liability partnership, who was an equity partner, was a worker for the purposes of the Employment Rights Act 1996 and could consequently benefit from the protection afforded to whistleblowers under this Act.
In her leading judgment Lady Hale concluded that 'one may be a professional person with a high degree of autonomy as to how the work is performed' and still fall within the definition of worker under the Act. She stated that this would be 'particularly applicable to businesses and professions operating within the tightly regulated fields of financial and legal services'.
The Supreme Court decision could potentially have far-reaching implications for LLPs, as it clarifies for the first time the employment status of members and the protection afforded to them. The case has been remitted to the employment tribunal for a decision on its merits.