Can Controlling Shareholders Be Employees?

In Secretary of State for Business, Enterprise and Regulatory Reform (BERR) v Neufeld & Anor [2009] EWCA Civ 280, the Court of Appeal considered whether controlling shareholders can also be employees and held that in principle they can.

Mr Neufeld and Mr Howe were controlling shareholders and directors of their respective companies. When their companies went insolvent, they claimed that they were employees in order to make a claim on the National Insurance Fund (NIF). The Court of Appeal upheld the Employment Appeal Tribunal decision that both the claimants were employees. The wider purpose of these appeals was to obtain guidance for dealing with such cases. The issue is of importance to BERR due to the conflicting legal authorities and the fact that there were approximately 12,000 claims by directors for payment from the NIF in 2008.

The Court of Appeal acknowledged the complications that had resulted from guidance in the two previous leading cases (Fleming v Secretary of State for Trade and Industry [1997] IRLR 682 endorsed by Secretary of State for Trade and Industry v Bottrill [1999] ICR 592) and set out new guidance for Tribunals in determining whether a shareholder or director of a company is an employee. This includes considering whether the individual's contract is a genuine contract or a sham and assuming that it is a genuine contract, whether it amounts to a contract of employment. Where there are no documents which show an employment relationship, relevant considerations would be the means of payment and the capacity in which the individual does the work. In providing the new guidance, the Court of Appeal expressly rejected the previous view that an individual could not be an employee if they were a controlling shareholder of the company.