Who Is An Employee Director On Insolvency?

Who is an employee director on insolvency is an important topic for employees of insolvent companies. In recent times directors have often been at some risk of having their redundancy claims rejected by the Insolvency Service’s redundancy payments service if they have been unable to show they acted as an employee.

The case of White and Hughes v Car-Tech (Staffordshire) Ltd (In Liquidation) and The Secretary of State for Business and Trade (England and Wales : Breach of Contract) [2024] UKET 1304020/2023 (“White”) looked into the questions relevant to the determination of what is an employee.

A director can claim redundancy on liquidation in their capacity as an employee. 

Formal Written Employment Contract For Directors

It is not uncommon for directors of limited companies to go onto the payroll without the existence of formal written contracts of employment. This appears to have arisen in the White case.

In White, both directors’ personal tax records showed they were registered as employees with HMRC of the company concerned, Car-Tech (Staffordshire) Ltd (“the Company”). Both directors were not working or employed by another company. However, their claims to the National Insurance Fund were rejected.

Employees Entitlement To Claim For Payment Of Redundancy When Employer Insolvent

Under Section 166 of the Employment Rights Act 1996, an employee can claim a redundancy payment when their employer is insolvent. 

Employment Entitlement To Claim For a Debt

Section 182 of the Employment Rights Act 1996 enables an employee to claim from the Secretary of State debts they are owed under an employment contract.

Section 184 of the Employment Rights Act 1996 sets out the debts which apply:

• Arrears of pay.
• Notice pay.
• Holiday pay for a period of six weeks during the prior twelve months prior to insolvency and or dismissal.

What Is An Employee?

Under Section 230 of the Employment Rights Act 1996 an employee is a person who has entered into a contract of employment which is a contract of service.

There are three tests for an employee:

1. For a wage the employee will provide their own work.
2. The employer will have some control over the employee.
3. An employment contract is a contract of service.

In this case, tax records such as payslips were noted as relevant evidence of employment.

In this case, initially, only the directors were employees and had they not been employed there would have been no income.

National Minimum Wage Impact

The Secretary of State suggested that the wage of the directors was low and not a genuine salary of an employee given other mechanics were paid £15 per hour.

A key issue in this case was that there was a period between April 2022 and June 2022 in which the directors were paid below the national minimum wage. However, it was noted that for almost 20 years they worked at a rate above the national minimum wage and working for pay below the national minimum wage is not necessarily dispositive for employment determination.

““Having considered the figures in the pay slips and tax records and the hours work as set out in the claimant’s statements and oral evidence, I am satisfied that they were paid a rate above the minimum wage save for the period between April 2022 and June 2022. Up until the end of June 2022 both claimants were working 20 hours per week and received a weekly pay of £183. This equates to an hourly rate of £9.15. The national minimum wage increased from £8.91 to £9.50 in April 2022. However, I note that from the beginning of July 2022 both claimants increased their hours and received a pay raise, where they received an hourly rate of £9.68. There is a short period of 3 months where the claimants worked for pay below the national minimum wage threshold, however, for almost 20 years they worked at a rate above the national minimum wage.”Whilst being paid below the national minimum wage would point away from employment, it is not a determinative factor. In this case, in the context of the length of employment, the pay fell below the national minimum wage threshold for only a short period and pay was adjusted, shortly thereafter. Further, I accept that the claimant’s relied on the accountants to guide them with regards to the pay rate and were paid at a rate above the national minimum wage for the majority of the employment. This would suggest that the claimants were employees of the first respondent….

…

The Employment Appeal tribunal in Secretary of State for Business, Innovation and Skills v Knight [2014] IRLR 605, EAT rejected the contention that because an employee had forfeited a salary for periods of time that meant that her status had changed from being an employee.”

How Employee Status Was Determined

In his matter, the court determined employee status as follows:

72. In summary, the following factors taken together demonstrate that Mr White and Mr Hughes were employees of the first respondent:

a. They attended work for the duration of the operating hours each day

b. There was a clear distinction between their roles as an employee and their role as a director

c. They worked for set hours between 20 and 25 hours per week

d. They were paid a regular salary which was subject to the PAYE scheme

e. Pay slips and P60 tax documents were issued

f. They conducted themselves in the same way as other employees when absent and when booking leave

g. There is no evidence that they could substitute another for the role of an employee

h. There is no evidence that they used first respondent money as personal money

i. They were accountable to each other and the accountant

j.  They did not work anywhere else

73. Therefore, I am satisfied on the balance of probabilities, that the claimants were employees of the first respondent.