Owner of insolvent company entitled to statutory redundancy payment

David McRae
16th Jun 2014

A redundant employee is entitled to claim a statutory redundancy payment from the National Insurance Fund (NIF) if their employer is unable to make the payment as a result of insolvency. Usually the payments are made without too much difficulty, but this is not necessarily the case where the claimant is the owner of the insolvent business.

UK Money

A redundant employee is entitled to claim a statutory redundancy payment from the National Insurance Fund (NIF) if their employer is unable to make the payment as a result of insolvency. Usually the payments are made without too much difficulty, but this is not necessarily the case where the claimant is the owner of the insolvent business.

In these circumstances, the Secretary of State often puts the claimant to proof that they were a genuine employee of the business.

 

For an employment relationship to exist, it is necessary for the employer to have control over the work performed by the employee. In the case of a majority or sole shareholder, it is arguable that the necessary element of control does not exist. However, case law over the years has made it clear that even a sole shareholder in a company can be its employee at the same time, provided the relationship is otherwise consistent with that of employer/employee.

 

There must also exist mutuality of obligation: the obligation of the employer to offer work for payment and the obligation of the employee to perform the work offered.

 

In a recent case, the Employment Appeal Tribunal (EAT) had to consider whether the sole shareholder of an insolvent company could be classed as an ‘employee’ in order to claim a redundancy payment from the NIF, even in circumstances where she had foregone her salary for a substantial period to keep the business afloat.

 

The owner had entered into a contract of employment with the company. The contract stipulated working hours and a salary with bonuses. The owner worked in excess of her contractual hours, often for less than contractual salary and did not pay herself dividends. In the last two years the owner did not pay herself a salary. The Secretary of State argued that by not taking salary for those two years the owner had either agreed to a variation in her contract which had ended her employment, or alternatively that the arrangement lacked the necessary mutuality of obligation.

 

However, on the facts the EAT accepted that the owner had remained an employee of the company. It decided that as the owner remained entitled to that salary, her decision not to take it did not alter the obligations of the parties under the contract. As a result the owner satisfied the core requirements to establish employee status and could claim from the NIF.

 

This case reinforces the point that business owners would be well advised to consider whether they should have a proper employment contract in place in respect of their own work for their business. As long as terms of the employment contract are properly observed, there is a reasonable chance that they will be able to avail themselves of the same benefits and legal protections as apply to their other employees.

 

You can read the judgment here.

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