THE INDUSTRIAL TRIBUNALS

CASE REF:   1629/11

CLAIMANT:		Thomas Neville Orr

RESPONDENT:		Department for Employment and Learning

Certificate of Correction

In the Decision issued on 5 January 2012 point (A) should be substituted with the following version:

(A) Pursuant to Article 205 of the Employment Rights (Northern Ireland) Order 1996 (“the Order”), it is determined that Herdman Holdings Ltd. is liable to make a redundancy payment of £11,210 to the claimant and that the later sum is payable to the claimant by the Department, in accordance with Article 203 of the Order, in relation to that redundancy payment.

Chairman:

Date:			11 January 2012

THE INDUSTRIAL TRIBUNALS

CASE REF:	1629/11    

CLAIMANT:	Thomas Neville Orr

RESPONDENT:	Department for Employment and Learning

DECISION
The unanimous decision of the tribunal is that:
(A)	Herdman Holdings Ltd is liable to make a payment of £11,210 to the claimant in respect of redundancy pursuant to Article 201 of the Employment Rights 	(Northern Ireland) Order 1996 (“the Order”).
(B)	The Department ought to make a payment of £3,040 to the claimant under Article 227 of the Order in respect of wages.  
(C)	The Department ought to make a payment of £912 to the claimant under Article 227 in respect of holiday pay.
(D)	The Department ought to make a payment to the claimant under Article 227 in respect of notice pay.
(E)	The parties expect to be able to agree on the amount of the payment due to the claimant in respect of notice pay.  However, if necessary, the proceedings will be re-convened for the purpose of determining the amount of notice pay which is due to the claimant.

Constitution of Tribunal:
Chairman (sitting alone):	Mr P Buggy
Appearances:
The claimant was represented by Ms R Best, Barrister-at-Law, instructed by Copeland McCaffrey Solicitors.  

The respondent was represented by Mr P McAteer, Barrister-at-Law, instructed by the Departmental Solicitors Office.

REASONS

1.	The effect of Article 201 of the Order, in broad terms, is as follows.  If an employee is entitled to a redundancy payment from his employer, but the employer is insolvent, the Department, in its role as statutory guarantor in respect of certain employment debts, must make a payment to the employee in respect of that 	redundancy payment.  If the Department declines to make a payment pursuant to the Article 201 application, the employee has a right of appeal to an industrial tribunal.  (See Article 205 of the Order).

2.	The Department is also the statutory guarantor in respect of the payment of certain 	other employment debts, including wages, holiday pay and notice pay, if the employer is insolvent (in the sense in which insolvency is used in the relevant part of the Order.  (See Article 227 of the Order).  If the Department declines to pay pursuant to any Article 227 application, there is a right of appeal to an industrial tribunal. 

3.	The claimant did make an Article 201 application, which was refused.  This is the 	claimant’s Article 205 appeal against that refusal.  

4.	The claimant did make an Article 227 application to the Department.  That 	application was also refused.  The claimant also appeals against that refusal.

5.	This is my Decision in respect of both of those appeals.  

6.	The claimant was Managing Director of a company which subsequently became 	known as Herdman Holdings Ltd (“the Company”).  He had worked on a full-time basis for the Company for 32 years.  Since the 1990s, he had been the company’s Managing Director.  He ceased to work for the Company with effect from July 2010, because of the difficult economic situation in which the Company then found itself.  At that time, the Company purported to dismiss the claimant from what the Company and the claimant asserted was his contract of employment as Managing Director of the Company.  He was not given the due notice of termination of employment which ought to have been given to an employee in those 	circumstances.  At that time, the Company owed a sum to the claimant in respect 	of wages and accrued holiday pay entitlements.

7.	The Company has become insolvent, in the sense in which the term “insolvent” is used within the context of those provisions of the Order which deal with the 	Department’s role as the statutory guarantor (in respect of redundancy pay and in 	respect of certain other employment debts). 

8.	In August 2010, the claimant made a claim to an industrial tribunal against the 	Company in respect of redundancy pay and in respect of breach of contract.  (The 	latter claim including claims in respect of wages, holiday pay and notice pay).  Those proceedings were not contested by the Company.  The case was heard by Mr Ian Wimpress, an industrial tribunals Chairman.  Mr Wimpress decided that the claims were all well-	founded.

9.	In the meantime, the claimant had made his applications to the Department 	pursuant to Article 201 and Article 227 of the Order.  As already noted above, those 	applications were refused.  

10.	At the beginning of the hearing of these appeals, Ms Best, on behalf of the claimant argued that these appeals had to be successful because of the Wimpress Decision.  Subsequently, she abandoned that argument.  (In my view, she was right to do so, not least because of the implications of the decision of the House of Lords in Secretary of State for Employment v Globe Elastic Thread Co Ltd [1979] IRLR 327 and because of comments which were made by the Employment Appeal Tribunal at the end of its judgment in Jones v Secretary of State for Employment [1982] 1 ICR 389.

11.	The Department accepted that these appeals should be successful if, but only if, the 	claimant was employed by the Company under a contract of service (a contract of 	employment) at all relevant times.

12.	For the purposes of the redundancy pay appeal, the relevant period is the period of 	20 years ending on 21 July 2010.  In the context of the wages appeal, the relevant period is the period when the wages became due to the claimant.  In the context of the holiday pay appeal, the relevant period is the period when the claimant accrued the relevant holiday pay entitlements.  In the context of the notice pay appeal, the relevant period is the period of 12 years ending on 21 July 2010.  

13.	The claimant contends that he was employed by the Company under a contract of 	service throughout all of the relevant periods.  He says that from 22 December 1998 	onwards, his contract of employment consisted of a written contract (“the Contract”) 	which was entered into on that date.

14.	The Department accepts that the claimant was employed to the Company under a contract of service for more than fifteen years, until about 2005.  The Department accepts that, from December 1998 until 2005, the relevant contract of 	employment consisted of the Contract.

15.	During the course of this hearing, I received lengthy sworn oral testimony from the 	claimant.  During the course of that testimony, he was subjected to skilful and 	detailed cross-examination.  Having carefully considered all of that testimony, and having had regard to the documentary evidence which was made available to me, I was sure that the claimant was an entirely truthful and credible witness.  

16.	I saw a bundle of documents, along with some miscellaneous documents.  I 	told the parties that I would not have any regard to any document within the 	bundle, for evidential purposes, unless one or more of the parties drew my attention 	to that document.  

17.	The Contract is entitled “Director’s Service Contract”.  Having considered the terms 	of the Contract, I am satisfied that it is a contract of service.  My understanding is 	that the Department also accepts that the Contract is a contract of service.  

18.	The main issue in this case (about which the parties are in dispute) is the following. 

19.	The claimant says that the Contract governed the claimant’s working relationship with 	the Company throughout the period up to July 2010.  The Department argues that the Contract ceased to govern the relationship 	between the parties from 2005 onwards when (according to the Department), mainly on account of changes in the economic and commercial priorities of the Company, the focus of the claimant’s working relationship with the Company changed radically.  

20.	Until the hearing of these appeals, the Department had reason to believe that the 	claimant might have been a major shareholder either in the Company or in some other company which was associated with the Company.  However, as a result of the claimant’s testimony. I am entirely satisfied that, throughout all the relevant periods, he was not a substantial shareholder either in the Company or in any associated company.

The law

21.	The following cases are of particular relevance in the context of the central dispute these appeals: 

	(1)	Clark v Construction Initiatives Ltd [2008] IRLR 364, which is a decision of the Employment Appeal Tribunal, 

	(2)	Neufeld v Secretary of State for Business, Enterprise and Regulatory [2009] EWCA Civ 280, which is a Court of Appeal judgment, and 

	(3)	Autoclenz Ltd v Belcher [2011] UKSC 41.  

22.	The other two cases must of course be read subject to the points that are made in Autoclenz; and Clark has to be read subject to Neufeld.

23.	Clark and Neufeld were cases which were concerned with the issues which arise 	when a controlling shareholder asserts that he is an employee.  The principles 	which emerge from those two cases are also relevant in a situation (like the present 	situation) in which there is a dispute regarding the legal effect of a purported 	contract of employment, between a company and someone who is not a major 	shareholder of that company, provided of course that due allowance is made for the 	circumstance that the particular contract is not one involving a major shareholder.  

24.	In Autoclenz, the judgment of Lord Clarke was the judgment of the Court.

25.	As is pointed out in paragraph 20 the Autoclenz judgment, the general rule, 	under the law of contract, is that, whenever there is what purports to be an exhaustive written contract, the terms of that written contract are regarded as being 	determinative.  

26.	However, Autoclenz is authority for the proposition that, in the context of an “employment” dispute, it is possible to go beyond the written terms of the contract in each of two situations.  (See paragraphs 22-32 of Autoclenz).

27.	The first such situation is one in which the documents executed by the parties are intended by them to give to others the appearance of creating (between themselves) legal rights 	and obligations which are different from the actual legal rights and obligations which the parties intend to create.  In other words, this is a situation in which the parties to 	the purported contract entered into it with a view to painting a false picture as to the true nature of their respective obligations.  

28.	The second situation is a situation in which the parties, without necessarily having 	any intention of misleading others, enter into a written contract which does not 	represent their true intentions and expectations.  

29.	The proper approach for a tribunal to take, in the context of a case in which the 	second situation is alleged to exist, is outlined at paragraphs 29-32 of Autoclenz .In 	my view, the guidance given in that part of Autoclenz can be summarized as 	follows:

	(1)	The tribunal must consider whether or not the words of the written contract 		represent the true intentions or expectations of the parties (and therefore 			their implied agreement and contractual obligations) when the relevant 			written contract was made.  

(2)	The tribunal must consider whether the words of the written contract 		represent the true intentions or expectations of the parties (and therefore 		their implied agreement and contractual obligations) at any later stage, if at 	such a later stage the evidence shows that, at that stage, the parties have expressly or impliedly varied the agreement between them.

	(3)	The aim of the tribunal’s inquiries, in either of those contexts, is to 			discover the actual legal obligations of the parties.  To carry out that 		exercise, the tribunal will have to examine all the relevant evidence.  That 		relevant evidence includes the written contract itself.  It also includes 		evidence of how the parties conducted themselves in practice and what their 	expectations of each other were.

	(4)	In considering what the parties’ expectations of each other were, evidence of 	how they conducted themselves in practice may possibly be so persuasive 	that the tribunal can draw an inference that that practice reflected the true 		obligations of the parties.  But it must be remembered that it is the 	obligations of the parties which are the subject of enquiry.  So the mere fact 	that the parties conducted themselves in a particular way in practice does not of itself mean that that conduct accurately reflected their legal rights and obligations.  (See paragraph 31 of Autoclenz).  

(5)	The focus of the relevant enquiry is to ascertain the true nature of the rights 		and obligations of the parties.  So the fact that a particular right was not 			exercised, or the fact that a particular entitlement was not actually invoked 		is not always an inevitable indication that the relevant right was not a 			genuine right, or that the relevant obligation was not a genuine obligation.  		The tribunal’s task must be to ascertain what was agreed between the 			parties.  
(6)	If a contractual right exists, it does not matter that it is not used.  It does not 		follow from the fact that a term is not enforced or invoked that such a term is 		not a part of the contract.  (See paragraph 19 of Autoclenz). 

(7)	If a particular clause of a contract genuinely reflects what might realistically 	be expected to occur, the fact that the rights conferred have not in fact been 	exercised will not render the right meaningless.  (See paragraphs 25 and 26 of Autoclenz).  

(8)	The question in every case is what was the true agreement between the parties.  (See paragraph 29 of Autoclenz).  

30.	In the circumstances of this case, what other legal guidance is available to me, in seeking to ascertain the true nature of the contractual relationship between the claimant and the Company during the period from 2005 onwards?  In my view, it is 	appropriate to consider the eight factors listed by Elias J at paragraph 98 of Clark.  

31.	However, some of the Clark factors are irrelevant in this case, because the claimant was not a major shareholder in the Company or in any associated company.

32.	Factors (3), (7) and (8) are irrelevant, in the circumstances of this case, for that reason.  

33.	Factor (6) is also irrelevant, in the circumstances of this case.  

34.	Accordingly, the only Clark factors which are relevant in this case are Factors (1), (2), (4) and (5).

35.	Factor (1) really consists of two separate factors, which I will refer to as Factor (1A) and Factor (1B) respectively.  

36.	In essence, Factor (1A) is to the following effect;  

“Where there is a contract ostensibly in place, the onus is on the party seeking to deny its effect to satisfy the court that it is not what it appears to be”.

However, the mere production of a written contract purporting to be a contract of employment will not shift to the opposing party the burden of proving that it is not a genuine such contract.  Furthermore, the “burden” referred to in Factor (1A) does not amount to a legal burden.  In cases where the putative employee is asserting the existence of an employment contract, it will be for him to prove it.  If the putative employee’s assertion is challenged, the tribunal will need to be satisfied that the document is a true reflection of the claimed employment relationship, for which purpose it will be relevant, in particular, to know what the parties have done under it.  (See paragraph 88 of Neufeld).

37.	Factor (1B), in essence, is to the following effect:

 If the putative employee has paid tax and national insurance as an employee, that may be a significant indicator that he was indeed an employee.  

38.	However, as Mr McAteer has emphasized, the value of Factor (1B) as an indicator is much lessened, if not indeed eliminated, in circumstances in which the claimant is paying tax and national insurance which would be payable by him even if he was only a 	director (as distinct from also being an employee). 

39.	Factor (2), in its application to this case, can be summarized as follows;

The fact that the claimant is in practice able to exercise real control over what the putative employing company does is a fact which does not prevent a contract of employment arising.

40.	Factor (4) is as follows;
		
		“If the conduct of the parties is in accordance with the contract that would be 	a strong pointer towards the contract being valid and binding.  For 		example, this would be so if the individual works the hours stipulated or does 	not take more than the stipulated holidays.”  

41.	Factor (5) is as follows;
		
	“Conversely, if the conduct of the parties is either inconsistent with the contract (in the sense described described in para 96) or in certain key 	areas where one might expect it to be governed by the contract it is in fact not so governed, that would be a factor, and potentially a very important one, militating against a finding that the controlling shareholder is in reality an employee”.

In my view, Factor (5) must be read subject to the very important qualification set out within the bracketed material: at paragraph 96 of Clark, Elias J made the following comments:

“That is not to say that any minor breach of the terms will invalidate the 		contract.  However, if the controlling shareholder acts in a manner which 	suggests that the contract is being set at nought or is treated as no more 	than an irrelevant piece of paper, then the Tribunal will be entitled to refuse to give effect to it.”	

42.	Incidentally, with great respect, I consider that the phrase “entitled to refuse to give effect to it” is potentially misleading.  If there is a valid contract of employment, a tribunal has no discretion in the matter.  Instead, the task of a tribunal is merely to determine whether there is, or is not, a valid contract of employment.  

43.	In my respectful view, what is really meant in paragraph 96 of Clark is as follows:  If the controlling shareholder acts in a manner that suggests that the contract is being set at nought or is treated as no more than an irrelevant piece of paper, then the tribunal will be entitled to conclude that the written contract does not reflect the true legal relationship between the parties.

Conclusions

44.	I have already set out various findings of fact above.  For the sake of readability, 	and in order to avoid repetition, I have also set out some additional findings of fact 	below.  

45.	As Mr McAteer has pointed out, the December 1998 contract (“the Contract”) 	included a clause (Clause 21.3) which provided that the Contract was to contain the 	entire understanding between the parties.  I have no reason to doubt that, as at 	December 1998, the Contract did indeed contain the entire understanding between 	the parties.

46.	Clause 21.3 also provided that the Contract was only to be capable of being varied 	by a Supplementary Agreement or Memorandum signed by or on behalf of the 	parties to the Contract.  	

47.	Against that background, Mr McAteer draws attention to a letter which was sent to 	the claimant on 10 June 2005, from Mr James Herdman (the Chairman of the 	Company, and the major shareholder in the Company).  That letter was in the 	following terms;

		“In my capacity as Chairman I met with the two Herdmans Holdings Limited’s  two non executive directors to discuss payment of a bonus and incentive payment for you.  

We recognise that without your dedication and commitment that the 		Company would be in much greater financial difficulty …  We also recognise that as other directors have left the Company you have taken on additional responsibilities and duties with a much-increased workload …  If you were to depart the company at the present time it would greatly affect our relationship with our current debenture holders.  Therefore it is essential that you continue on in your present position to guide the company through this difficult time.  

		You are well aware of the challenges that are facing us in the coming 			months.  However, as far as the Board is concerned I have listed the major 		challenges and tasks that remain.  I know that this is not an exhaustive list;  

			[There then follows a nine – point list]

		Therefore, subject to consultation with the Company’s lawyers and Bankers 		and within the constraints caused by cash flow we are pleased to award you 		two hundred thousand pounds payable in ten equal monthly instalments.  			Having regard to your exceptional efforts and achievements to date the first 		five payments are unconditional, approval of the remainder will be subject to 		an informal review of the outcome of the tasks listed above”.  

48.	I conclude that the agreement recorded in the 10 June 2005 letter does constitute a 	variation of the Contract.  I also conclude that that variation was not carried out in 	accordance with the provisions of Clause 21.3.  But, so what?  The parties to a 	contract are always entitled to ignore a particular formal provision of a particular contract, if it suits them to 	do so.  By ignoring a particular formal provision, they do not thereby signify an abandonment of the essential provisions of that contract as a whole.  

49.	I see nothing in the terms of the June 2005 letter which indicates an intention, on the part of the Company or on the part of the claimant, to depart from the essential features of the Contract.  I note that the letter records that the main reason for the supplemental agreement is that it is essential that the claimant “should continue on in your present position“ [My emphasis].  The list of “challenges” as set out in the letter, 	merely indicate that there have been changes in the focus and the key results areas 	of the Managing Director post.  That often happens, in relation to the posts of many employees, without changing the essential features which are the hallmarks of a particular contract of service.   

50.	What the Company is doing, in the letter of June 2005, is to offer the claimant an 	inducement to remain in his current post, as distinct from offering him a 	fundamentally different contractual relationship with the Company.

51.	The Department has pointed out that aspects of the claimant’s contractual entitlements 	in relation to pension were not honoured for a lengthy period.  However, as the claimant confirmed during the course of his oral testimony, those commitments have, in substance, subsequently been honoured.  

52.	The Department also draws attention to the fact that contractual commitments in 	relation to the claimants’ salary, as set out in the Contract, were not honoured in 	various respects.  However, I accept that this happened because of the financial 	difficulties in which the Company subsequently found itself.  Furthermore, as is 	pointed out in Autoclenz (paragraphs 25 and 26), the fact that parties do not act in line with their contractual commitments is not in itself a ground for concluding that 	those commitments are non-existent.   

53.	Clause 11 of the Contract provided that, during his period as 	Managing Director, the claimant was to devote his whole time and attention to the 	business of the Company and was not, without the prior consent of the Board, to engage in any other business.  During the years from 1998 onwards, the claimant 	in fact held a variety of non-executive directorships of other bodies, unassociated with the Company, even though he had not obtained the prior written consent of the 	Board to do so.  

54.	Nevertheless, I do not regard those circumstances as constituting an indicator 	that the parties did not intend to be bound by, or to continue to be bound by, the terms 	of the Contract.  First, the relevant directorships imposed relatively little demands upon the claimant’s time.  Secondly, most of those directorships related to bodies of a philanthropic or socially beneficial nature (as distinct from commercial businesses).  Thirdly, in participating in those bodies, the claimant did have the informal consent of the major shareholders of the Company.  Fourthly, in any event, the parties to a contract of employment do not show an intention to abandon or fundamentally vary that contract, merely by failing to adhere to a formal and relatively inconsequential contractual detail.  

55.	In carrying out the central task which I have to 	carry out (which is to determine whether or not, from 2005 onwards, the claimant was employed under a contract of service), I do not think it is particularly helpful to examine in detail whether the 	duration of the holidays actually taken by the claimant was entirely consistent with 	the holiday entitlements conferred by the Contract.  One expects that employer and employee will show some 	leeway, regarding holidays to be taken, in the context of the role of Managing Director of a major company.  

56.	Typically, a managing director is both an officer of the relevant company and that company’s overall manager.    

57.	In his role as a director, the managing director participates in the governance of the 	company (by virtue of his membership of the company’s Board).  

58.	In his role as manager, the managing director is in effect the chief executive of the company.  In that chief executive role, a managing director can either be the chief servant of the company, or a person who is a contractor providing personal 	services.  

59.	Whether such an individual, in that role, is a servant or a contractor, depends upon the detailed terms of the relevant contract between the company and himself.  There is no doubt, and the Department does not dispute, that the terms of the 1998 Contract indicate that, in 1998, in his role as overall manager of the company, the claimant was being employed as a servant of the company and under a contract of service.  

60.	In his capacity as a member of the Company’s Board, the claimant no doubt had a significant role in the governance of the company.  However, in light of the 	evidence in this case, I am satisfied that his role as director involved a relatively small proportion of his overall duties as Managing Director.  In arriving at 	that conclusion I have also taken note of the fact that the claimant was the  Company 	Secretary.

61.  	The Department has drawn attention to the fact that the claimant had a substantial 	measure of control in relation to how he did his work. However, as has been made 	clear both in Clark and in Neufeld, the mere fact that a controlling shareholder is in  	practice able to exercise real or sole control over what the company does is not a fact which of itself prevents a contract of employment arising (See Factor (2) of the Clark list of factors).  The implication is that ability to control what the company does is still less relevant (in ascertaining whether a relationship of master and servant exists) if that control is being exercised by somebody who has no substantial shareholding in the company.  

62.	Most public and private entities have a chief servant: somebody who is at the 	head of the staffing apex.  A chief servant will in practice have a substantial degree of control over the day-to-day operations of the entity.  That in itself is not a reason for classifying that chief servant, that chief executive as somebody who is not engaged under a contract of service.  There is no legal principle that the authority which necessarily has to be conferred upon a chief servant thereby 	transforms that servant into a master, or into an independent contractor. 

63.	Against that background, and for all those reasons, I have no hesitation in 	concluding that this claimant was employed by this Company at all material times 	under a contract of service.  

Remedies

64.	On the amounts due to the claimant, the parties are agreed, except in respect of any amount due for notice pay.

Interest

65.	This is a relevant decision for the purposes of the Industrial Tribunals (Interest) (Northern Ireland) Order 1990.

Chairman:

Date and place of hearing:  22 November 2011, Belfast