Many employment law rights are only available to those who are employees. For someone to have employee status, they must work under a contract of employment. Protection from unfair dismissal, under the Employment Rights Act 1996, is only afforded to someone who has been an employee for 12 months continuously.
Just because someone is the controlling shareholder of a company does not mean that they cannot also be an employee of the company. When determining someone’s employment status, a Tribunal will consider all the relevant information and assess whether or not the contract of employment truly reflects the nature of the relationship. In Clark v Clark Construction Initiatives Ltd. (CCI) the Employment Appeal Tribunal (EAT) has handed down guidance on how Tribunals should approach this task.
Mr Clark brought several claims before the Employment Tribunal (ET), including a claim of unfair dismissal, after he was dismissed from the construction business that he had established. When he was the controlling shareholder, his status was said to be that of an employee, although he did not have a formal written contract of employment. He received a very small salary but his living expenses were met by loans from the company. He intended to repay these from the dividends he would receive if and when the company became profitable. He later transferred the shares to someone else but remained as managing director of the company on a higher salary. Less than 12 months later he was dismissed.
The ET ruled that Mr Clark was not an employee of CCI during the period when he owned the majority of the shares and it therefore did not have jurisdiction to hear the unfair dismissal claim because he did not have the 12 months’ continuous employment needed to qualify for protection.
The EAT dismissed an appeal against this decision. The ET was entitled to reach the decision it had, based on the facts presented to it. When giving its judgment, the EAT described three sets of circumstances in which it would be legitimate not to give effect to what was claimed to be a binding contract of employment. These are when the company itself is a sham; where there is an ulterior motive for the contract (for example in order to receive statutory redundancy pay); or where the parties to it do not conduct their relationship in accordance with the contract – this might be because they never intended to or because the nature of the relationship no longer reflects the terms of the contract.
The EAT then went on to list eight factors for consideration by Tribunals in such cases. For example, the fact that an individual has a controlling shareholding may raise doubts as to the nature of the relationship but does not of itself prevent a contract of employment arising, nor does the fact that an individual is able to exercise sole control over what the company does, nor the fact that the individual built the company up and will profit from its success. The onus is on the party seeking to deny the contract’s effect to satisfy the court that the contract is not what it appears to be, particularly where someone has paid Income Tax and National Insurance Contributions as an employee. The conduct of the parties in practice with regard to the terms of the contract is key.
See theguidance on deciding whether the contract is one of employment or self employment (paragraph 98) .
Just because someone is the controlling shareholder of a company does not mean that they cannot also be an employee of the company. When determining someone’s employment status, a Tribunal will consider all the relevant information and assess whether or not the contract of employment truly reflects the nature of the relationship. In Clark v Clark Construction Initiatives Ltd. (CCI) the Employment Appeal Tribunal (EAT) has handed down guidance on how Tribunals should approach this task.
Mr Clark brought several claims before the Employment Tribunal (ET), including a claim of unfair dismissal, after he was dismissed from the construction business that he had established. When he was the controlling shareholder, his status was said to be that of an employee, although he did not have a formal written contract of employment. He received a very small salary but his living expenses were met by loans from the company. He intended to repay these from the dividends he would receive if and when the company became profitable. He later transferred the shares to someone else but remained as managing director of the company on a higher salary. Less than 12 months later he was dismissed.
The ET ruled that Mr Clark was not an employee of CCI during the period when he owned the majority of the shares and it therefore did not have jurisdiction to hear the unfair dismissal claim because he did not have the 12 months’ continuous employment needed to qualify for protection.
The EAT dismissed an appeal against this decision. The ET was entitled to reach the decision it had, based on the facts presented to it. When giving its judgment, the EAT described three sets of circumstances in which it would be legitimate not to give effect to what was claimed to be a binding contract of employment. These are when the company itself is a sham; where there is an ulterior motive for the contract (for example in order to receive statutory redundancy pay); or where the parties to it do not conduct their relationship in accordance with the contract – this might be because they never intended to or because the nature of the relationship no longer reflects the terms of the contract.
The EAT then went on to list eight factors for consideration by Tribunals in such cases. For example, the fact that an individual has a controlling shareholding may raise doubts as to the nature of the relationship but does not of itself prevent a contract of employment arising, nor does the fact that an individual is able to exercise sole control over what the company does, nor the fact that the individual built the company up and will profit from its success. The onus is on the party seeking to deny the contract’s effect to satisfy the court that the contract is not what it appears to be, particularly where someone has paid Income Tax and National Insurance Contributions as an employee. The conduct of the parties in practice with regard to the terms of the contract is key.
See theguidance on deciding whether the contract is one of employment or self employment (paragraph 98) .
