When can shareholders also have employee status?

When a company goes into insolvent liquidation, its employees are given a limited degree of protection from the immediate adverse financial consequences for them as individuals. Under section 182 of the Employment Rights Act 1996, the state will pay arrears of pay for up to eight weeks, notice pay, up to six weeks unpaid holiday pay and any basic award payable as compensation for unfair dismissal. In the recent case of Secretary of State for Business Enterprise and Regulatory Reform v Neufeld & another, the Court of Appeal has set out rules to govern when a director or controlling shareholder might have employee status so as to be able to claim these rights.

The claimant must be an employee.

In one of the cases considered by the Court of Appeal, the claimant was a controlling shareholder of the company, had given personal guarantees for the company and lent money to it. However, he was also a working director. Although he had no written contract, he was on the payroll and paid tax and National Insurance as an employee.

The other case concerned a “one-man” company. The claimant held 100% of the company’s shares and was the sole director. He paid himself a weekly salary and paid tax and NI as an employee. The Court of Appeal decided that both men had employee status. It said that it is irrelevant whether the individual has provided personal guarantees or loans for the company's benefit. There are only two tests -

  • Is there a genuine contract between the individual and the company or is it a sham? (using the test recently set out by the Court of Appeal in the Protectacoat Firthglow case); and
  • If there is a contract, is it a contract of employment or (e.g.) a contract for services, where an individual director is paid director's fees but does not have the rights or obligations of an employee?

Point to note –

  • The Court of Appeal stressed that each case will depend on its facts. In this case it had been accepted that the employment contracts were not ‘shams’. In another case the court might have taken a different view.