Company directors and redundancy claims

The Employment Rights Act 1996, section 182, provides that, where an individual's employer  has become insolvent and the individual's employment has terminated, certain debts owed by the employer to the employee will be met, on application by the individual, by the Insolvency Service.

Relevant debts include up to eight weeks of arrears in pay, pay in lieu of notice, and unpaid holiday.  Further details can be found here.

There has been uncertainty over whether a shareholding director is an employee for these purposes. In BERR v Neufeld and Howe [2009] EWCA Civ 280, the Court of Appeal heard two test cases concerning, in turn, a 90% shareholder and co-director, and a 100% shareholder and sole director.   

The court held that whether an individual is an employee is a question of fact.  Non employee-like conduct and behaviour, such as the giving of personal guarantees  and not taking a full holiday entitlement, did not mean the director was not an employee.  With the control of any employee being exercised by the company, through the agency of its director(s), it was possible for a sole director to be an employee.  Importantly, having sole or majority shareholding control did not  prevent an individual from also being an employee.

Factors that would cause a claim to employment status to fail would be the contract (oral or written) being a sham, or the individual acting purely as a director and not also as an employee. 

The judgment records that, in 2008, claims to the insolvency service were made by some 12,000 company directors, of which a considerable number were also controlling shareholders.