The precedent case for many years has been Lee v. Lee's Air Farming Ltd [1961] AC 12 where it was held that the sole shareholder was an employee but, in this case, it was for the purposes of an insurance claim for a fatal accident. Then in 1997, two further cases gave different results Buchan & Ivey v. Secretary of State for Trade and Industry [1997] EAT stated that a 'controlling' shareholder could not be an employee. Whereas in Fleming v. Secretary of State for Trade and Industry [1997] EAT it was stated that a controlling shareholder could be an employee.

The question came up for review again in Secretary of State for Trade and Industry v. Bottrill [1999] EWCA Case No. 980132. In this case it was decided that Mr Bottrill was an employee of his limited company despite the fact that he was the Managing Director and a sole shareholder at the material time. In a further case in 2000, Farleigh v. Secretary of State for Trade and Industry [2000] EAT it was decided that a sole shareholder could not be an employee of his own limited company for the purposes of a redundancy payment from the National Insurance Fund.

Despite the apparent chaos, there is some order in answering this question. To identify the issues it is necessary to look at the cases. The most pertinent case and one which was discussed in the Court of Appeal is Bottrill. In this case Mr Bottrill was the Managing Director of Magnatech UK Ltd (Magnatech) and the one share that was issued was owned by Mr Bottrill. There was one other director and two employees. A draft shareholder agreement had been drawn up because an American group, that supplied Magnatech with all items for sale, was to obtain an 80% share in the company. Before the agreement was executed, however, Magnatech became insolvent.

Mr Bottrill had signed a contract of employment with Magnatech for a period of three years. This contract set out his duties, the hours to be worked, the annual review of his remuneration, his holiday and sick pay and various other provision consistent with employment. As a result of the insolvency of the company a Receiver was appointed and Mr Bottrill was duly dismissed for reasons of redundancy. Mr Bottrill applied to the Secretary of State for Trade and Industry for a redundancy payment. The claim was turned down on the grounds that he was not an employee. Mr Bottrill then applied to the Industrial Tribunal who came to the conclusion that he was an employee and this was upheld by the Employment Appeal Tribunal (EAT). The EAT then gave leave to appeal to the Court of Appeal.

In the Court of Appeal Miss Eady, appearing for the Secretary of State, maintained that firstly, "…an individual who holds the sole or controlling shareholding in a limited company is not to be regarded as an employee for the purposes of the ERA." Secondly, that the "…de facto economic or commercial control of the company is not relevant to the question of employment status". Miss Eady was relying upon the reasoning of the EAT set out in the decision of Mummery J in Buchan and Ivey. In those cases Mr Buchan held a 50% share in his company and Mr Ivey a 98% share in his company. Mummery J stated that "..if the claimant is able, by reason of a beneficial interest in the shares of the company, to prevent his dismissal from his position in the company, he is outside the class of persons intended to be protected by the provisions of the [Act] and is not an employee…"

The decision in Buchan was cited to the Inner House of the Court of Sessions in Fleming In that case Mr Fleming was the Managing Director of the company in which he held a 65% share. He worked alongside other employees had the same hours of work and no other employment, he was also paid under the PAYE system. Mr Fleming was turned down by the Secretary of State for his claim for redundancy when the company went insolvent on the grounds that he was not an employee. The Industrial Tribunal and the EAT upheld this decision but, in the Inner House Lord Coulsfield took a different view. Lord Coulsfield regarded the fact that Mr Fleming was a majority shareholder as being a relevant and important factor in determining whether or not employment existed but, was not prepared to accept that it was decisive. In addition to this it was also stated in Fleming that the decision in Buchan was regarded as being unsound.

The Court of Appeal in Bottrill agreed with both the Industrial Tribunal and the EAT in concluding that Mr Bottrill had a genuine contractual relationship with his company. It was decided that Mr Bottrill's status as a sole shareholder was only temporary and any control he had of the company was only theoretical. The actual control was held by the American group.

In conclusion Lord Woolf MR speaking for the Court of Appeal, gave some guidance on how to decide on the status of a controlling shareholder. It was stressed, however, that they were not rigid guidelines for the factual inquiry by the tribunal because each case must be decided on the particular circumstances. The questions which the tribunal might wish to consider are these:

1.Is there a genuine contract of employment between the company and the shareholder?

2.How and for what reasons did the contract come into existence (for example, was the contract made at a time when insolvency was foreseeable)?

3.What did each party actually do in pursuance of the contract?

If it is decided that the contract is not a sham then:
4.Does the employment contract actually give rise to an employer/employee relationship?

In establishing this point, the usual factors which can be regarded as relevant might be:
5.the degree of control exercised over the shareholder employee;

6.whether there are directors other than or in addition to the shareholder employee;

7.whether the constitution of the company gives that shareholder rights such that he is in reality answerable only to himself and incapable of being dismissed.

8.If he is a director, is he able under the Articles of Association to vote on such matters in which he is personally interested, such as the termination of his contract of employment; and

9.what was the actually conduct of the parties pursuant to the terms of the contract.

The application of the legal propositions summarised above to the facts of a particular case may produce a different legal result according to whether or not the claimant has a controlling shareholding in the company. If the claimant is able, by reason of a beneficial interest in the shares of the company, to prevent his dismissal from his position in the company, it is likely that he is not an employee.

In Farleigh it was decided that Mr Farleigh could not be an employee of his limited company Novatex. Despite the apparent conflict with the decision in the Bottrill case, this case actually follows the same guidelines. In this case Mr Farleigh "ended up with control of the company" in his own words when in 1997 he became the sole shareholder. The only other director was his wife who also worked for the company but had no shareholding. In May 1998, the company went into liquidation and Mr Farleigh claimed redundancy payments from the National Insurance Fund.

The EAT, in upholding the decision of the tribunal, found that from 1997 onwards when Mr Farleigh became sole shareholder he was not then an employee of the company. The reasons stated were that: (a) there was no-one in the company to whom Mr Farleigh was answerable; (b) there was no-one who could dismiss him; (c) there was no-one to control his actions; (d) he was in effect the sole proprietor of this business; and it was he who dismissed the employees when the company went into liquidation.

In considering the facts, the tribunal accepted that a controlling shareholder can be an employee but that in this case when the relevant factors were weighed it was decided that Mr Farleigh was not. In addition to the change in share ownership and the heavy investment which was made in the company which involved personal guarantees, there was also no contract of employment in writing, no evidence of an express or oral agreement, and no board minutes or written memorandum. The terms of the legal relationship between the Company and Mr Farleigh were not one of employer/employee and the control of the company by Mr Farleigh was genuine.

So, it cannot always be assumed that you are an employee of your company. If you are a sole shareholder or have a controlling interest in the company, or you are a sole director or the only other director has no voting rights; you cannot be dismissed, are not answerable to anyone and no-one controls your actions then, it is likely you are not an employee of your limited company. It must be remembered, however, that these cases were decided upon in the context of claiming redundancy money from the Secretary of State when the companies went insolvent. Despite this it does appear to be a good indicator of the situation.