Mark Craven v Forrest Fresh Foods Limited

This appeal raises the question of whether the Employment Tribunal correctly analysed the entitlement of the claimant, who was an employee and a director of the respondent, to salary and/or sick pay.

The appeal is against a judgment of Employment Judge Cline after a hearing on 6, 7 March and 10, 11 May 2023. The judgment was sent to the parties on 8 August 2023.

JOB TITLE

The contract provided that the claimant was employed as a “Business Development Manager” with normal working hours of “47.5 per week between the hours of 6.00am and 6.00pm Monday to Friday” with a salary of “£10,600.20 per annum payable weekly in arrears by BACS” with duties that would be “advised by a Director” and might be “modified from time to time to suit the needs of the business”.

The Employment Tribunal recorded that the salary was set to be below the threshold for income tax. The claimant received further remuneration as a “director”. This was not a matter about which the Employment Tribunal made any findings. On 1 April 2016, the claimant was allocated one dividend only “D” Share”. On 30 June 2016, the claimant was appointed as a statutory director of the respondent. The Employment Tribunal did not make any substantive findings about what, if any, changes there were to the claimant’s duties when he became a statutory director.

The payments made to the claimant increased substantially over time. The Employment Tribunal recorded that the claimant received £32,878 in 2016-17 which increased to £76,640 for 2017-18. Payments were made predominantly as “dividends” and “director’s loans”. A pay slip in the supplementary bundle demonstrated that the claimant was still being paid an annual salary that was only a small proportion of his total remuneration.

The Decision of the Employment Tribunal

I reject the Respondent’s assertion that the Claimant ceased to be an employee entirely when he became a director , that the 2015 contract was therefore void and that his position was then governed solely by the terms of the articles of association. However, I also reject what I understand to be the basic tenor of the Claimant’s position that his appointment as a director had no real impact on his employment status and that, in effect, all monies due to him were due to him as an employee pursuant to his employment contract. As such, when determining whether the Claimant was entitled to the sums he now claims, I have had to consider each claim as a discrete issue because it has not been possible to establish any overarching agreement between the parties as to what sums the Claimant could expect to receive and in what capacity. [emphasis added]

The Respondent’s position is that, in effect, all pay to the Claimant by the relevant period was in his capacity as a director and shareholder. I am conscious that there was no specific agreement that the August 2015 contract had been amended but I also note that, in that contract [173], the Claimant’s salary is put at £10,600.20 per annum. This is clearly a fraction of what he was receiving by the relevant period so it must be the case that the position changed by way of mutual conduct if not by specific agreement. I have already set out above my view that the Clamant has, in effect, been content to take the benefits of being paid by way of a dividend whilst, at the same time, asserting that he did not understand the position and simply left it to Mr Craven to deal with on his behalf. In my judgment, the Claimant cannot have it both ways if he now says that he is entitled to payment as an employee pursuant to his contract. Despite the Claimant’s assertions in this regard, I have not seen or heard anything to persuade me that the position set out by Mr Craven is wrong. The fact that the Claimant received payments from the Respondent into his bank account on a monthly basis does not indicate anything about the legal basis of that payment; indeed, the Claimant himself commented in cross-examination that he effectively just accepted the money and did not seek to question or understand the basis upon which it was being paid.

I am required to make findings of fact on the basis of the evidence before me and, as such, I find on the balance of probabilities that the Claimant either agreed or, at the very least, acquiesced over time, to a payment structure based not on the contract of August 2015 but on his position as a director. As such, once he had been removed as a director in accordance with the articles of association in June 2022, he was not entitled to any further payments from the Respondent on the evidence I have seen. [emphasis added]

Was the Claimant entitled to PAYE earnings between 10th June 2022 and 17th January 2023? For the reasons set out above at paragraphs 32 to 35, I find the answer to be no.

Whilst I have found in relation to his monthly income that the Claimant cannot rely on the August 2015 contract for the purposes of his monthly income, the position can be, and in my view is, slightly different in relation to sick pay. The August 2015 contract states specifically that “[t]here is no contractual sickness/injury payments scheme in addition to SSP”. Reference is made to the employee handbook [175], which says in section 3 [181] that statutory sick pay is to be paid “if you are eligible”. Neither party addressed me on this point. As above, I have found that, for the purposes of his monthly income, the Claimant was not entitled to payment after his removal as a director in June 2022. The Claimant claims an entitlement to unpaid sick pay for the same period. However, given that the August 2015 contract does not provide for anything other than SSP and, by the relevant period, the Claimant had been removed as a director (and therefore, as I understand it, is not eligible for SSP), it must follow that he is not entitled to SSP during the relevant period.

Was the Claimant entitled to sick pay between 10th June 2022 and 17th January 2023? For the reasons set out above at paragraph 36, I find the answer to be no.

The appeal

I believe that the points identified under the headings “misapplying the law” and “perversity” are reasonably arguable. I am also concerned that the Judge decided a case of this sort on the burden of proof. Although the point is entitled perversity, this is a misnomer as it is a pure point of law as it relates to the legal principle that if a person works they should be entitled to pay and the interconnection of employment and directorship.

Subsequent Employment Tribunal decision

The Law

13 Right not to suffer unauthorised deductions.

An employer shall not make a deduction from wages of a worker employed by him

the deduction is required or authorised to be made by virtue of a statutory

the worker has previously signified in writing his agreement or consent to the

27 Meaning of “wages” etc.

In this Part “wages”, in relation to a worker, means any sums payable to the worker

any fee, bonus, commission, holiday pay or other emolument referable to his

statutory sick pay under Part XI of the M1Social Security Contributions and

230 Employees, workers etc.

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 .

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. [emphasis added]

It seems to us that where it is established that a person has been appointed managing director of a company, that his duties include effective management of the affairs of the company in all its aspects, that he has discharged those duties, and that he has been remunerated by that company in the sense that he has received a salary from the hands of that company, the prima facie conclusion to be drawn is that he is an employee of the company.

We recognise the attractions of having in relation to the Act of 1996 a simple and clear test which will determine whether a shareholder or a director is an employee for the purposes of the Act or not. However, the Act does not provide such a test and it is far from obvious what Parliament would have intended the test to be. We do not find any justification for departing from the well established position in the law of employment generally. That is whether or not an employer and employee relationship exists can only be decided by having regard to all the relevant facts. If an individual has a controlling shareholding that is certainly a fact which is likely to be significant in all situations and in some cases it may prove to be decisive. However, it is only one of the factors which are relevant and certainly is not to be taken as determinative without considering all the relevant circumstances. …

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.

In assessing the nature of the agreement between the parties the manner in which tax has been paid and any description of the nature of the contract is relevant, but not determinative: Young and Woods Ltd v West [1980] IRLR 20 CA.

Analysis

Regrettably, I have concluded that the decision of the Employment Judge was perverse. Under a contract of employment the employee agrees to undertake work for another, under some degree of control, in return for wages. The Employment Judge held that when the claimant became a director on 30 June 2016 he continued to be an employee but under a contract that did not require him to do any work for the respondent as an employee, and gave him no entitlement to wages as an employee. The antithesis of a contract of employment. That follows from the decision that despite the claimant continuing to be an employee all the work he did was as a director and all remuneration was received in that capacity. The Employment Judge focused almost entirely on the manner in which payments were made, the majority being by way of “dividends” and “director’s loans”. In Clark v Clark Elias P suggested those are factors that “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”. The claimant had entered into a contract of employment in August 2015 which the Employment Judge appeared to accept subsisted, at lease in respect of some terms. That contract gave the claimant a job title, set hours of work and at least part of his remuneration, and provided that his duties would be “as advised by a Director”. The Employment Tribunal was required to make findings of fact about the claimant’s duties and his agreed remuneration, whatever the manner of its payment, immediately before he became a director. Because there was an employment contract in existence at the time the claimant became a director the Employment Judge had to consider whether it was terminated, which he does not appear to have concluded was the case; or varied and, if so, how and what the variations were. Consideration should then have been given to any additional duties the claimant undertook once he became a director and whether he performed them as part of his duties under his contract of employment, or on some other basis. There is nothing unusual about an employee being made a director and undertaking some additional directorial roles in their capacity as an employee. Many employees are appointed as directors without a substantial change in their duties. The claimant was not a controlling director. It appears that the business was still run by Mr Craven. The Employment Judge did not make the necessary findings of fact, did not apply the correct legal principles and reached a decision that was perverse.

Embargoed judgment

As usual the judgement was sent out under embargo to allow represented parties the opportunity to point out typographical errors and the like. Mr Bonze provided a few suggested typographic corrections. Unfortunately, Ms Evans-Jarvis improperly sought to take the opportunity to re-argue matters and introduce facts that were not found by the Employment Tribunal. The covering email sent when judgments are sent under embargo makes it clear that this should not be done. There was no “invitation to make representations prior to finalization” as suggested by Ms Evans-Jarvis. I see no reason whatsoever to vary the substantive content of the judgment.