Ian Dawson on controlling shareholders' employment rights

Ian Dawson is a partner in the employment department at Shulmans.

A recent Court of Appeal decision brings good news for employees who are also controlling shareholders and who are seeking to recover money when the company becomes insolvent.

The Court of Appeal held in Secretary of State for Trade and Industry v Bottrill that there is no law that a controlling shareholder cannot also be an employee of the company for the purposes of the Employment Rights Act 1996.

Peter Bottrill became managing director of Magnatech UK in 1994. He was the controlling shareholder but only because he held the single share issued. It was intended that other shares would be issued and the controlling interest passed to a US company. However, before the agreement was concluded, Magnatech became insolvent, leaving Mr Bottrill the sole shareholder.

The significance of the case is that, on the insolvency of an employer, business men and women will not be prevented from seeking to recover monies from the Secretary of State for redundancy payments, unpaid wages, holiday pay and payments in lieu of notice, just because of their position as a controlling shareholder.

However, employment lawyers should still exercise caution, as the decision does not establish that all controlling shareholders are automatically held as employees.

Some assistance for applicants and their advisers can be taken from the guidelines put forward in the case by the Court of Appeal.

The starting point is to consider if there is or has been a genuine contract between the company and the shareholder, for example how tax was paid. Provision of sick pay, remuneration and holidays is also relevant.

It is also important to look at why the contract came into existence – for example, if it was created at a time when insolvency was imminent, and what each party actually did pursuant to the contract.

Although the contract may be called a contract "of employment", it should be asked if the relationship was of employer and employee. The degree of the company's control over the shareholder is also important. Whether the shareholder could prevent his own dismissal, for example because of his voting rights, is also relevant.

Advisers and tribunals need to weigh up all factors before deciding if the applicant is an employee and able to claim employment rights. Although a controlling shareholding is a significant factor, it is not the only matter to be considered.