Clark v Clark Construction Initiatives Ltd: UKEAT/225/07

EAT: Elias J (President), Mr D Bleiman and Mr P Gammon: 29 February 2008

An employment tribunal rejected a claim by a managing director that he had been continuously employed by the respondent company for one year, within the meaning of section 212 of the Employment Rights Act 1996, on the ground that during part of that time, though he was formally declared to be an employee, given that he was the controlling shareholder, he was paid a very small salary, his not inconsiderable living expenses were covered by loans drawn on the company and no contract of employment had been drawn up, he was in fact in business on his own account rather than employed under a contract of employment. The tribunal accordingly dismissed his unfair dismissal claim.

The claimant appealed.

The Employment Appeal Tribunal held:

When considering whether a controlling shareholder is also an employee, there may be three sets of circumstances where it could be legitimate not to give effect to what is alleged to be a binding contract of employment. First, where the company itself is a sham; second, where the contract is entered into for some ulterior purpose; and, third, where the parties do not in fact conduct their relationship in accordance with the contract, either because they never intended that it should be so conducted, or because the contract has ceased to reflect the true nature of the relationship.

When determining whether or not an ostensible contract of employment should be given effect to, tribunals should consider the following factors. (1) The onus is on the party seeking to deny its effect to satisfy the court that it is not what it appears to be, particularly where the individual has paid tax and national insurance as an employee. (2) The mere fact that the individual has a controlling shareholding does not of itself prevent a contract of employment arising, nor does the fact that in practice he is able to exercise real or sole control over what the company does. (3) The facts that the individual is an entrepreneur, or has built the company up, or will profit from its success do not militate against a finding that there is a contract in place. (4) A strong pointer towards the contract being valid and binding would be where the parties’ conduct is in accordance with the contract. (5) Conversely, if the conduct of the parties is either inconsistent with the contract, or is not in fact governed by the contract in certain key areas where one might expect it to be so governed, that would be an important factor militating against a finding that a controlling shareholder is in reality an employee. (6) The assertion of a genuine contract will be undermined if the terms have not been identified or reduced into writing. (7) The fact that the individual takes loans from the company or guarantees its debts could exceptionally be relevant, but in most cases would be unlikely to carry any weight. (8) The fact of a controlling shareholding may raise doubts as to whether the individual is an employee but does not of itself resolve those doubts one way or another.

As there was no misdirection by the tribunal and it had reached a conclusion on the evidence which was open to it, its decision that the claimant was not an employee at the material time so as to establish the requisite continuity of employment and that, accordingly, it did not have jurisdiction to hear his complaint of unfair dismissal, would be upheld.

The appeal was dismissed.

Appearances: James Laddie (Chattertons, Grantham) for the claimant; Neil Hamilton (Bird & Co LLP) for the respondent company.