An Employment Tribunal has recently decided that an individual can be deemed an 'employee' even where they have declined to be paid for their services. In Secretary of State for Business, Innovation and Skills v Knight, Mrs Knight was the managing director and sole shareholder of a limited company. In the two years preceding the company's insolvency in 2011, Mrs Knight had worked without taking a salary in order to keep the company afloat, although her contract of employment had provided for remuneration.
The basis for the case related to a payment from the National Insurance Fund provided for under the Employment Rights Act 1996 for employees whose employment has terminated following the insolvency of their employer. Thus a claimant has to meet the legal definition of an 'employee' in order to be eligible for it.
The Employment Rights Act defines an employee simply as "an individual who has entered into.……a contract of employment". Case law has further provided key tests to determine this, particularly a 1968 case brought by Ready Mixed Concrete wherein the key tests for the existence of a contract of employment were that:
- An agreement exists to provide the servant's own work or skill in the performance of service for the master ("personal service") in return for a wage or remuneration.
- There is control of the servant by the master ("control").
- The other provisions are consistent with a contract of service.
Subsequent case law has confirmed the requirements for "personal service" and "control" and added "mutuality of obligation" which is the employer's obligation to provide work and the individual's obligation to accept that work. It is generally accepted that the absence of any one or more of these key elements would indicate that an employment contract does not exist. Further, it has previously been established that a director and/or majority or sole shareholder of a limited company can be an employee.
The crucial fact in this case was that despite not receiving it, Mrs Knight was nevertheless entitled to a salary; it was accepted that this notional entitlement to a salary was sufficient consideration for a valid employment contract to exist. The finding is thus not contrary to McKenna J's finding in the Ready-Mixed Concrete case that there must be a wage or other remuneration in order to fulfil the legal requirements for a contract.
The case may have been decided differently however if Mrs Knight had chosen not to exercise her right to salary as a means to bolster the company's profits and pay herself by way of dividends instead, which would have tax benefits. Clearly, each case needs to be determined on its facts, but any indication that the company is itself a sham, the contract is entered into for an ulterior purpose or the parties do not conduct their relationship in accordance with the contract may cast doubt upon any assertion that the individual should be classed as an employee.
The ruling will also have wider implications for other types of employment rights available to employees, not just those relating to insolvency situations.
This is not legal advice; it is intended to provide information of general interest about current legal issues.