Appeal No. UKEAT/0177/07/JOJ

EMPLOYMENT APPEAL TRIBUNAL
58 VICTORIA EMBANKMENT, LONDON EC4Y 0DS

	At the Tribunal
	On 17 January 2008
Judgment handed down on 11 April 2008

Before
HIS HONOUR JUDGE McMULLEN QC
(SITTING ALONE)

MR R NEUFELD	APPELLANT

1) A & N COMMUNICATIONS IN PRINT LTD – IN LIQUIDATION
2) SECRETARY OF STATE FOR TRADE AND INDUSTRY	RESPONDENTS

Transcript of Proceedings

JUDGMENT

	APPEARANCES

For the Appellant	MR CLIVE H. JONES
(of Counsel)
Instructed by:
Messrs Gray Purdue Solicitors
Wellesley House
202 London Road
Waterlooville
Hampshire
PO7 7AN	
For the Secretary of State	MR JOHN O’FLAHERTY
(of Counsel)
Instructed by:
The Treasury Solicitor (Employment Law Team)
1 Kemble Street
London
WC2B 4TS	

SUMMARY
Jurisdictional Points – Worker, employee or neither
The Employment Judge erred in holding that the Claimant was not an employee when he was a 90% majority shareholder yet had a contract of employment as a salesman which was not a sham, and the parties conducted themselves in accordance with the contract.  Applying the subsequently decided judgments in Nesbitt and Clark, the correct analysis of the relationship was that the Claimant was an employee for the purposes of the insolvency provisions of the Employment Rights Act 1996.

HIS HONOUR JUDGE McMULLEN QC

1.	This case concerns the definition of an employee for the purposes of claims against the Secretary of State following insolvency of a business.  The judgment has been delayed to allow the parties to make additional submissions and to take account of the judgment subsequently delivered i.e. Clark v Clark Construction Initiative Ltd [2008] UKEAT/0225/07 Elias P and members.  

2.	I will refer to the parties as follows: Mr Neufeld is the Claimant; A & N Communications in Print Ltd in Liquidation is the company but it plays no part in these proceedings; the Respondent is the Secretary of State for Business Enterprise and Regulatory Reform.

Introduction
3.	It is an appeal by the Claimant in those proceedings against a judgment of Employment Judge Hardwick sitting alone at Reading registered with reasons on 1 February 2007.  The Claimant has been represented throughout by Mr Clive Jones of Counsel and the Secretary of State is today represented by Mr John O’Flaherty of Counsel.  

The issue
4.	The single issue for the Employment Judge to resolve was whether the Claimant was an employee of the company in October 2005 when it became insolvent.  The definition is contained in Employment Rights Act 1996 section 230:

 “230 Employees, workers etc
	(1) In this Act “employee” means an individual who has entered into or works under (or, where the employment has ceased, worked under) a contract of employment.
	(2) In this Act “contract of employment” means a contract of service or apprenticeship, whether express or implied, and (if it is express) whether oral or in writing.”

5.	Protection is given to an employee whose employer has become insolvent by section 182 which provides as follows:

“182 Employee’s rights on insolvency of employer
If, on an application made to him in writing by an employee, the Secretary of State is satisfied that-
	(a) the employee’s employer has become insolvent,
	(b) the employee’s employment has been terminated, and
(c) on the appropriate date the employee was entitled to be paid the whole or part of any debt to which this Part applies,
the Secretary of State shall, subject to section 186, pay the employee out of the National Insurance Fund the amount to which, in the opinion of the Secretary of State, the employee is entitled in respect of the debt.”

The Claimant’s claim for redundancy payment, notice pay and holiday pay are made against the Secretary of State and amount to roughly £10,000.  The Secretary of State contends that the Claimant was not an employee and so rights under section 182 do not arise.  

6.	A preliminary hearing of this matter was ordered by HHJ Birtles and thence a full hearing by HHJ Ansell. The liquidator indicated that the company would not oppose the appeal.

The facts
7.	The overall conclusion of the Judge was that the Claimant was not an employee, a conclusion reached after a consideration of “the preponderance of characteristics of the relationship between the company and the Claimant”. The facts were expressed as follows:

3.1.	The claimant commenced employment with a company Neufeld Press Ltd in 1982 as part of its sales team. He became a Director in 1988 and a shareholder. In July 2001 the undertaking of Neufeld Press Ltd transferred to the first respondent.
3.2.	There was an oral agreement between the claimant and his fellow directors Mr Munns and Mr Faulkner that the claimant would be managing director and also be employed as part of the sales team of the Sales Director Mr Faulkner. The claimant gave evidence that indeed he was a successful sales person achieving the highest volume of business compared to others of the sales force.
3.3.	The Tribunal saw the shareholding of the first respondent (R28). The claimant held 90% of the ordinary shares and his co-directors 5% each. The claimant said he was very much engaged in the business working 60 hours a week on average carrying out his sales and managerial roles. He also helped with production wherever necessary. There were about 18 employees in the business of the first respondent and all the manual employees had written contracts of employment. The three directors did not have contracts of employment.
3.4.	As regard the control of the company the claimant gave evidence that the three directors had worked together for over 20 years and they guided each other. The claimant had given personal guarantees in respect of the business of the first respondent.

8.	The reference in paragraph 3.3 to the absence of contracts of employment means contracts in writing as the following finding may explain:

“5.1…The claimant certainly had a contract of employment albeit oral and it has not been suggested that there was anything unusual or a sham about that contract save the fact that it was not confirmed in writing.”

The Employment Judge considered authorities and submissions and made the following further findings:

“5.4.	I reject the submission that the absence of a written contract is a factor that should be held against the claimant.
5.5.	I have looked at the issue of the effective control by the first respondent of the claimant. He says the three directors themselves took the decision to go into liquidation. He gave evidence of the directors working together for a period of 20 years in what he called a collegiate atmosphere and they all agreed an approach. Nevertheless in reality if there was an issue on which there was disagreement when push came to shove it will be the opinion of the claimant which would carry the day having regard to his 90% shareholding. He could remove the other two directors and with his shareholding could obstruct any efforts to remove or discipline him by the other two directors.
5.6.	The claimant in evidence said that three quarters of the time when he was a director he did not take his full holiday entitlement but that for the remainder of the time he did. Generally speaking employees do take their full holiday entitlement and this factor is a pointer against employee status and more to one of operating one’s own business.
5.7.	What I find points particularly against employee status is the situation of the personal guarantees. There was a personal guarantee on one of the machines of £10,000. The claimant in evidence said that the machine was worth £150,000 and that it was a paperwork thing. There was a personal guarantee on the sales financing i.e. factoring arrangements up to £20,000 - £25,000. The claimant said that the bank manager asked him to do this and Counsel for the claimant said that this was a situation in the case of Sellars. In that case it was stated the fact that a third party, the company’s bankers, required the employee to remain with the group as controlling shareholders as a condition of their support does not bear upon the present issue unless a position as controlling shareholder is incompatible with the status of employee which it is not. That is one thing, but in my opinion it is quite another thing for the bank to require a personal guarantee. The claimant said it was never called upon and it was merely put in place as a fetter against air invoices, i.e. invoices for goods not produced. There was also a personal loan from the claimant to the company of £20,000.
5.8.	In my view the claimant has endeavoured to put a gloss on these issues. If a factoring company has advanced money and the sales do not materialise because of insolvency, it can have recourse to any guarantee. The company itself may not be worth pursuing. There is no doubt in the Tribunal’s mind that in arriving at these arrangements the claimant was seeking to give an advantage to the first respondent. However at the same time in the Tribunal’s view he was involving himself in potential personal losses and liability. Very few employees would enter into such an arrangement where their own capital is at risk. In my view it points to the claimant running his own business as a manager and major shareholder of that business seeking commendably to secure ongoing finances through its bankers.
5.9.	I have also taken into account against the overall background the very significant shareholding of the claimant.”

The legal principles
9.	The legal principles have been set out in guidance expressly addressed to Employment Tribunals in two judgments. In Secretary of State for Trade and Industry v Bottrill [1999] IRLR 326 Lord Woolf for the Court said this:

“27	[Counsel] asked us to provide what guidance we can because of the frequency with which problems of the type of exemplified by this case arises.  We are anxious not to lay down rigid guidelines for the factual enquiry which the tribunal of fact must undertake in the particular circumstances of each case but we hope that the following comments may be of assistance.
28	The first question which the tribunal is likely to wish to consider is whether there is or has been a genuine contract between the company and the shareholder.  In this context, how and for what reasons the contract came into existence (for example, whether the contract was made at a time when insolvency loomed) and what each party actually did pursuant to the contract are likely to be relevant considerations.
29	If the tribunal concludes that the contract is not a sham, it is likely to wish to consider next whether the contract, which may well have been labelled a contract of employment, actually gave rise to an employer/employee relationship.  In this context, of the various factors usually regarded as relevant (see, for example, Chitty on Contracts 27th edn (1994) para. 37-008), the degree of control exercised by the company over the shareholder employee is always important.  This is not the same question as that relating to whether there is a controlling shareholding.  The tribunal may think it appropriate to consider whether there are directors other than or in addition to the shareholder employee and whether the constitution of the company gives that shareholder rights such that he is in reality answerable only to himself and incapable of being dismissed.  If he is a director, it may be relevant to consider whether he is able under the Articles of Association to vote on matters in which he is personally interested, such as the termination of his contract of employment.  Again, the actual conduct of the parties pursuant to the terms of the contract is likely to be relevant.  It is for the tribunal as an industrial jury to take all relevant factors into account in reaching its conclusion, giving such weight to them as it considers appropriate.”

10.	Elias P sitting with members gave guidance in Clark paragraph 98 which was accepted by both counsel in the present case. Clark contains a comprehensive review of the authorities, including the judgment of Underhill J in Nesbitt v Secretary of State for Trade and Industry [2007] IRLR 847.  Both were decided after the judgment in the present case.  

11.	The President recognised that difficulties are placed in the way of determining whether a majority shareholder was an employee; see for example paragraph 86.  He acknowledged that both he and Underhill J in Nesbitt had had difficulty in a straight forward application of a clear rule deriving from the authorities which they both analysed.  Elias P cited two principles, three circumstances, or categories, and eight guideline factors all of which are important in reaching a conclusion on the legal issue, First the principles:
“Jurisdiction.
61.	We turn first to consider the case law relating to this question. Two principles seem to be firmly established.  The first, enunciated in a stream of cases, is that whether the contract of employment exists is for the tribunal to determine as an industrial jury, and any appellate body can interfere only if the decision involved a misdirection in law or was perverse. The second is that in determining this question, all relevant information must be considered: see for a recent statement of both these principles the decision of the Court of Appeal in Bottrill v Secretary of State for Trade and Industry [1999] ICR 592 and in Scotland, the decision of the Inner House of the Court of Session in Fleming v Secretary of State for Trade & Industry [1997] IRLR 682.
62.	But what material is relevant? That depends upon what the Tribunal is seeking to determine.  Of course, at one level it is simply asking whether an employment contract exists. But that simply raises a further question.   In practice, the claimant  will be alleging that there is such a contract- and will generally point to a formal written document- and the respondent will be contending that the courts should for some reason refuse to recognise it.  So the issue becomes this: on what grounds can the court refuse to give effect to the contract entered into between the company and the majority shareholder?  Until that question is answered, it is impossible to state what material is relevant and what is not.
63.	Classically, when the courts are faced with the situation whether someone is an employee or not, the alternative is that he is an independent contractor.  The distinction between the two is often hard to draw, and cases are highly fact sensitive, but in general the purpose of the exercise is designed to determine how fully the individual is integrated into the business and, conversely, how far he can be said to be working for himself.  The test of control always plays a significant part in the analysis but there are a whole range of factors potentially relevant to that question.   The starting point remains the three fold test identified by Mackenna J in Ready Mixed Concrete (South East) Limited v Minister of Pensions and National Insurance [1968] 2 QB 97.
64.	When the question is whether a controlling shareholder is also an employee, the task is generally a very different one.  In practice the individual will almost always be fully integrated into the business, frequently as the managing director or some other executive director.  It is not the lack of control of the company over the individual but rather the extent of the control of the individual over the company which sometimes creates doubts as to whether the contract of employment truly reflects the nature of the relationship.”

12.	The President then described the three circumstances - sham, ulterior motive and conduct:
92.	We would suggest that there may be three sets of circumstances where it may be legitimate not to give effect to what is alleged to be a binding contract of employment.  The first is in the circumstances envisaged by Underhill J, namely where the company itself is a sham.  

93.	The second is where the contract is entered into for some ulterior purpose, such as to secure some statutory payment from the Secretary of State.  Hence the reason why in both Fleming and Bottrill the courts recognised that one potentially relevant factor would be the circumstances in which the contract was created.  

94.	The third is where the parties do not in fact conduct their relationship in accordance with the contract.  This may be either because they never really intended that it should be so conducted, or because the relationship has ceased to reflect the contractual terms.  The former- where the parties never intended the contract to have any significance- is what would classically be described as a “sham”.  In Snook v London & West Riding Investments [1967] 2 QB 786 at 801 Diplock LJ said this:
“It is, I think, necessary to consider what, if any, legal concept is involved in the use of this popular and pejorative word. I apprehend that, if it has any meaning in law, it means acts done or documents executed by parties to the “sham” which are intended by them to give to third parties or to the court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create.”
His Lordship added that:
“…..For acts or documents to be a “sham” with whatever legal consequences follow from this, all the parties thereto must have a common intention that the acts or documents are not to create legal rights and obligations which they give the appearance of creating.”
But the contract may cease to reflect the true nature of the parties’ relationship even where no sham was originally intended.
95.	The second and third categories will overlap. If, for example, the contract is entered into in anticipation of an insolvency solely to land debts on the Secretary of State, that will be for an improper purpose and the contract will also be a sham in the sense identified by Diplock LJ. 
96.	Support for the notion that the Tribunals are entitled to refuse to recognise the contract as a contract of employment if it fails to reflect the true nature of the relationship is supported by the fact that the guidance in Bottrill twice emphasises the potential relevance of whether the conduct of the parties is consistent with the contract.  That is not to say that any minor breach of the terms will invalidate the contract.  However, if the controlling shareholder acts in a manner which suggests that the contract is being set at nought, or is treated as no more than an irrelevant piece of paper, then the Tribunal will be entitled to refuse to give effect to it.
97.	We agree with Underhill J that there are passages in the Bottrill judgment which might suggest that a potentially decisive factor is whether the individual in fact exercises real control over the company. But we do not think that the Court of Appeal can have intended to adopt such a principle.  First, it is not far removed from the approach in Buchan, which the Court unambiguously rejected.  Moreover, it does not sit happily with the Lee decision for the pilot in that case exercised entire control in law and in fact over the company.

13.	The President then set out the eight factors or guidelines:

98.	How should a Tribunal approach the task of determining whether the contract of employment should be given effect or not?  We would suggest that a consideration of the following factors, whilst not exhaustive, may be of assistance:
(1) Where there is a contract ostensibly in place, the onus is on the party seeking to deny its effect to satisfy the court that it is not what it appears to be. This is particularly so where the individual has paid tax and national insurance as an employee; he has on the face of it earned the right to take advantage of the benefits which employees may derive from such payments.
(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 he in practice is able to exercise real or sole control over what the company does (Lee).
(3)  Similarly, the fact that he is an entrepreneur, or has built the company up, or will profit from its success, will not be factors militating against a finding that there is a contract in place.  Indeed, any controlling shareholder will inevitably benefit from the company’s success, as will many employees with share option schemes (Arascene).
(4)  If the conduct of the parties is in accordance with the contract that would be a strong pointer towards the contract being valid and binding.  For example, this would be so if the individual works the hours stipulated or does not take more than the stipulated holidays.  
(5) Conversely, if the conduct of the parties is either inconsistent with the contract (in the sense described in para.96) or in certain key areas where one might expect it to be governed by the contract is in fact not so governed, that would be a factor, and potentially a very important one, militating against a finding that the controlling shareholder is in reality an employee.  
(6) In that context, the assertion that there is a genuine contract will be undermined if the terms have not been identified or reduced into writing (Fleming).  This will be powerful evidence that the contract was not really intended to regulate the relationship in any way.
(7) The fact that the individual takes loans from the company or guarantees its debts could exceptionally have some relevance in analysing the true nature of the relationship, but in most cases such factors are unlikely to carry any weight.  There is nothing intrinsically inconsistent in a person who is an employee doing these things.  Indeed, in many small companies it will be necessary for the controlling shareholder personally to have to give bank guarantees precisely because the company assets are small and no funding will be forthcoming without them.  It would wholly undermine the Lee approach if this were to be sufficient to deny the controlling shareholder the right to enter into a contract of employment.
(8) Although the courts have said that the fact of there being a controlling shareholding is always relevant and may be decisive, that does not mean that the fact alone will ever justify a Tribunal in finding that there was no contract in place. That would be to apply the Buchan test which has been decisively rejected.  The fact that there is a controlling shareholding is what may raise doubts as to whether that individual is truly an employee, but of itself that fact alone does not resolve those doubts one way or another.

14.	To the principles and guidance can be added an issue which arose in the present case.  It is to consider the date at which they are to be applied.  It seems to me that application of sections 182-183 of the Employment Rights Act yields the answer that the date when the question in section 230 is to be answered is the date of the insolvency i.e. was the Claimant an employee at the date of the insolvency?  It is the answer given by Mummery P in Rajah v The Secretary of State for Employment unreported EAT 7 July 1997.  He said this at page 6:
“There may well have been a change during the life of the company in Mr Rajaa’s relationship with it. The company started as a partnership company.  Originally there were other shareholders.  There were other directors.  What we have to look at, however, is what the industrial Tribunal had to look at was the position at the relevant date.  The relevant date for the purpose of deciding whether the Secretary of State is liable to make payments out of the national insurance fund to employees of an insolvent company is the date at which the company became insolvent not the position as it was two years, five years or ten years previously.”

15.	That proposition is supported by Lord Coulsfield’s judgment in the Inner House in Fleming v Secretary of State for Trade and Industry [1997] IRLR 682 at paragraph 10. Both were cited to the Court of Appeal in Bottrill where neither account was disputed.

16.	Related to this conclusion is a determination as to which contract of employment was in force.  The finding by the Employment Judge is that there was a contract of employment.  The Claimant submits it is dated 1982.  The Secretary of State contends that that contract was found by the Judge to have been varied in 1988 and again in July 2002.  I do not accept that submission, since the judge did not make that finding. But in any event it does not advance the Secretary of State’s case.  If the 1982 contract as a salesman has not been terminated or rescinded, it lives on either in its original form or as varied by agreement.  This might at first sight provide a simple solution to this case.  If there were in place a contract of employment at all times from 1982, either in its original form or with variations, the Claimant was an employee for the purposes of section 230 in 2005.  

17.	The judge found that the 1982 salesman’s contract continued.  The language of the finding as to 2001 clearly separates the salesman’s work from that of the managing director: “the Claimant would be managing director and also be employed as part of the sales team” (my emphasis). That is held to be a decision of the board.  It is also an indication of the way this board operated – it is not suggested that the decision was foisted upon the minority shareholders. The same might be said of the position in 1988 although it is less clear.  The Employment Judge did not find that the 1982 contract was varied. His finding indicates an additional two responsibilities undertaken by the Claimant – becoming a director and a shareholder.  There is no dispute that an employee can also occupy the other two roles, the three hats so graphically illustrated by Elias P.  It is also important to note that the Secretary of State has recognised that in this very company such a combination of roles is possible for that was his decision in relation to similar claims made by Mr Munns and Mr Faulkner, all three of them being directors and shareholders.

Consideration of Clark
18.	Before applying the guidelines in Clark it is instructive to recognise the facts which were decided in that case.  Mr Clark held all the shares. The question was whether he was truly an employee when he was managing director, without a formal written contract, and was paid a very small salary and relied upon directors’ loans pending dividends at the end of the year.  The Employment Tribunal’s conclusion that his position remained the same both before and after incorporation of the company was not upset.  The starting point was Lee v Lee’s Air Farming [1961] AC12 viz that in principle a company is separate from its shareholders.  Exceptions to this principle may arise where a person working in the company is also its majority shareholder, Elias P identified the three circumstances where the principle in Lee does not apply (see para 92ff)

19.	I accept the result of the verbal archaeology undertaken by Underhill J in Nesbitt at paragraph 12. It is that a company will be “a mere simulacrum” if it is shown there is no real intention to vest the business in the company and so to distinguish between the roles of majority shareholder and director.  In such cases, it is also apt to describe the company as a sham and necessarily the contract made between the company and the director will be a sham, too.  There is no issue on the first two exceptions. The company was not a “mere simulacrum” but was a real company in 1982, nor was the contract entered into between the company and the Claimant for an ulterior purpose or as a sham. That also satisfies the first question set out in the guidance of the Court of Appeal in Bottrill at paragraph 28.
20.	Focus in the present case is upon the third exception, that is the conduct of the parties in the relationship.   Elias P’s third circumstance or category corresponds to one of the relevant circumstances in the first question in Bottrill at paragraph 28: “what each party actually did pursuant to this contract…” and also in the second at paragraph 29, at least in part.  The Court there says “the actual conduct of the parties pursuant to the terms of contract is likely to be relevant”. In answering that question the Court suggests that the actual exercise of control by the majority shareholder will be relevant and the President concludes that this is not the sole test.  

21.	With respect, I agree that is the correct application of the Court of Appeal’s guidance. It also reflects the language used in Sellars Arenascene Ltd v Connolly [2001] IRLR 222 CA at para 16 by Pill LJ “the service agreement actually gave rise to an employer/employee relationship”. It follows, and this was the premise of the Claimant’s appeal, that one looks at the agreement itself and at the conduct of the parties in the way in which they performed the contract.  That the parties had other relationships such as shareholder, managing director, creditor or guarantor is relevant only to the extent that it reflects upon the conduct of the parties in carrying out the contract of employment. To adopt an approach which involves consideration of matters outside the conduct of the parties in performing the contract of employment casts the net too wide and is wrong in law.  With respect, the Employment Judge in our case who considered “the preponderance of factors” was wrong to include factors which did not reflect upon the conduct of the parties in the performance of the contract of employment. The Employment Judge erred, but of course he had not seen the judgments in Nesbitt and Clark. I am asked in that event by both counsel to make the decision myself and not remit it to the judge. This is a correct and proportionate approach in the light of the material before me and I will now adopt it.  

Application of Clark
22.	I will now apply the eight guidelines in Clark to the facts in the present case, as I indicated to the parties in advance of this judgment that I would.  Mr Jones positively submits I should and that the conclusion points in favour of his client.  Mr O’Flaherty acknowledges that the factors are of assistance and some are directly relevant but that they take the law no further than it was at the time of our hearing pre-Clark. He contends that, assisted by application of these factors, the only conclusion is in favour of the Secretary of State.  

1:  Sham
23.	The Secretary of State makes no submissions as to factors 1-3, simply submitting that they were each in effect considered by the Employment Judge and none was determinative.  There is no finding to unsettle the conclusion that the 1982 contract was valid, and was what it appeared to be, that is a contract of employment of a salesman. Nor is there any indication as to how that settled position changed in 1988 or 2001 or was not in place at the date of the insolvency in 2005.  In my judgment, these cases stand at the intersection of two important policies.  The first, contained in factor 1, is that a person who pays PAYE tax and national insurance as an employee should be entitled to the benefits as part of that regime should one of the specified events, such as a right to payment on insolvency, arise.  The second, contained in factor 3, is that genuine entrepreneurs, those who take risks for their own profit, should not be bailed out by the state when they make bad decisions.  These are policies which might provoke the curiosity of an industrial jury.  Mr O’Flaherty expressly declined to make submissions on either of these policies and Mr Jones relied only on the first, contending that the involvement of his client as an entrepreneur did not affect the contract of employment or the conduct of the parties in relation to it.  It is sufficient for me to answer the question posed in factor 1 by saying that no evidence was presented by the Secretary of State to displace the ostensibly valid contract of employment entered into in 1982 and left undisturbed as to the salesman role. In accordance with that contract, the Claimant continued to pay tax and national insurance as an employee. 

2 and 8:  Control
24.	 This can be taken together. It is clear that possession of a controlling shareholding is not conclusive nor does it necessarily indicate that control in the technical sense coming de facto by reason of the controlling shareholding means that there is control in the way in which the contract of employment is performed. As the President said in relation to factor 8, it is relevant and may raise doubts but no more.  In the instant case, the company consisted of a three person board of directors.  There was no evidence that the Claimant’s view overpowered the others.  I accept Mr Jones’s simple proposition that the fact that the Claimant had a majority shareholding did not of itself prevent a contract of employment existing alongside. Becoming a shareholder and a majority shareholder does not solve the problem.  It only resolves it if it affects the contract in one of the three identified ways i.e. the company is a sham, the contract is a sham or the conduct of the parties points in another direction.

3:   Profit
25.	From 1982 to 1988 the Claimant was simply part of the sales team and was neither a director nor a shareholder, he was not even a manager.  Of course, he took on a real stake in the company in 1988 when he bought shares and became a director. Thereafter, as Mr Jones implied, the Claimant built up the business with his colleagues and will have stood to gain from the profits earned as a result of their collective efforts.  Those matters are unconnected with his role as part of the sales team which continued undiluted.  From the 1980’s,  schemes have been in place to encourage participation by employees in the membership of their employing companies.  There is no legal inconsistency in the reward from a successful business being taken by a way of salary and by dividend, and it makes no difference that the beneficiary is paid by salary as managing director and also receives a dividend as majority shareholder.  

4 and 5: Conduct
26.	It is important to stress that this is conduct “in accordance with the contract”. Unchallenged findings were that the Claimant worked as a salesman as part of the sales team, and the company was obliged to provide him with that work.  There were obligations on the company to provide work and on the Claimant to accept and perform the work.  This dimension is not an issue in this claim.  In my judgment, those findings are conclusive on the issue of conduct of the parties.  The fact that the Employment Judge found that the Claimant did not take all his holidays, and worked 60 hours a week carrying out both his sales and managerial roles, does not destroy the key findings as to the performance by the parties of their respective roles.  The President’s example in factor 4 is of the circumstances debated at our hearing of a shareholder and managing director not doing his normal hours or taking half a year off as holidays, which would point towards exploitation of his proprietorship of the business rather than his being an employee.  

27.	The Secretary of State relies heavily upon the finding but this seems unfair.  In my experience, many people in senior positions in the public and private sector work long hours and do not take their full holidays.  There is no finding as to the number of hours required for the sales role but it must be less than 60 since the 60 hours completed included managerial roles.  It would be right under factor 4 to have serious doubts about an employee who never turned up to work. It would not be fair to extend it in the other direction to destroy the relationship of employment of a person who works beyond what might normally be described as his working day. The simple finding by the Employment Judge amounts to this:  in 12 of the last 17 years the Claimant did not take his full holiday.  This is not a reason to hold that the relationship was not one governed by a contract of employment.

6: Written terms
28.	The absence of a written contract or particulars pursuant to section 1 of the Employment Rights Act 1996 will be powerful evidence undermining the existence of a contract of employment.  But in my judgment the findings by the Employment Judge fill this absence.  It should be noted that the conclusion of the Employment Judge was that there was nothing “unusual or a sham about that contract save the fact that it was not confirmed in writing”.  In any event, the point did not impress him.  He acknowledged that “the Secretary of State seems to get very excited regarding the absence of a formal written contract”. This excitement did not extend to a ground in the Respondent’s Answer. That criticism cannot survive the plain finding by the Judge, both alone and in the context of his other findings, as to the terms of the contract: to provide work, to provide holidays, and not least that the other directors were employees notwithstanding the absence of written contracts.  

7: Loans and guarantees
29.	These might exceptionally be relevant.  Both occur in this case.  Dealing first with the loan, the sole finding is that there was a personal loan from the Claimant to the company of £20,000.  That finding occurs in paragraph 5.7 which is a point “particularly against employee status” and deals with guarantees, as does paragraph 5.8.  It is possible to read “these issues” and “these arrangements” as including both guarantees and the loan but that is not my view.  The extensive treatment of the guarantees is the subject matter of paragraphs 5.7 and 5.8 and it is in my judgment the finding on guarantees which clinched the decision of the Employment Judge against the Claimant’s employee status.  In any event, it is not a loan of the kind found in Clark as a loan by the company to the employee but vice versa.  It was an important factor because it took the place of salary remuneration.  Mr Clark was paid low wages but received advances against dividend as a form of loan.  It thus was integrated into the remuneration package and could probably be said to be part of the contractual relations.  The loan here is of an entirely different character, quite apart from it being made by the Claimant to the company.  Nor does it have the character of a guarantee being a triangular relationship.  The loan was not relied on by the Secretary of State in his Respondent’s Answer except to assert that the Employment Judge had made a detailed finding of fact that “he entered into personal guarantees of company loans”.   That submission is incorrect.  He gave guarantees and he made one loan, the two being different.  Otherwise the loan is not mentioned by the Claimant or the Secretary of State except by way of response in oral submission that the loan was a factor which weighed against him.  With respect, I do not think the Employment Judge so found and nor do I.  

30.	I turn now to the guarantees. This was a factor which particularly affected the Employment Judge’s opinion.  I accept the simple submission made by Mr Jones that the guarantee had nothing to do with the contract of employment.  Further, it can be understood by reference to the President’s reasoning in Clark since small companies’ controlling shareholders may have to give bank guarantees. To hold that the maintenance of a relationship of guarantor is inconsistent with employment is fraught with difficulties.  If the contract of employment were otherwise valid, by what mechanism did it cease to be upon the signing of a guarantee to the bank of the company’s liabilities?  An employee does not terminate his contract of employment when he enters into a parallel relationship with his employer e.g. as guarantor, lender, bailee (of a company car), purchaser (of the company’s products) or tenant (of its housing).  Other questions would arise: who brought the contract of employment to an end, what about notice, how to characterise the relationship which carries on as normal after the date of the guarantee?  In my judgment, unless the signing of the guarantee has some direct effect upon the terms and conditions of the contract of employment, or upon the way in which the parties thereafter conduct themselves in relation to that contract, it should not be treated as destroying the employment relationship.

Result
31.	I would very much like to thank both counsel for their oral and subsequent written submissions.  Applying the Clark principles to the facts as found, it is clear to me that the Claimant was an employee within section 230. The Secretary of State was obliged to so consider him for the purposes of making good the payments due to him on the insolvency of the company in 2005.  The appeal is allowed.