In Secretary for State v Knight UKEAT/0073/13/RN the sole director and shareholder of a company made a successful claim for redundancy pay when her company creased trading.

Mrs Knight was Managing Director and the sole shareholder of her company. Under the terms of her written employment contract she was entitled to a salary of £20k p.a. In the final two years of trading she had forfeited her salary in order to assist cashflow, nevertheless her company still became insolvent and went into liquidation. She then claimed redundancy pay from the Insolvency Service.

The case went to employment tribunal and the judge found that she was an employee and so entitled to redundancy pay. The secretary of state appealed the decision on the basis that the tribunal judge had made a perverse decision in that the act of forfeiting her pay effectively terminated her contract of employment: as a result there was no mutuality or there was no contract at all because there was no consideration moving from the employer to the employee.

On appeal HHJ Burke QC considered the argument, he said that. “..In any event, although McKenna J suggested in Ready Mix that remuneration in some form is an essential ingredient of a contract of employment, there may be a contract of employment, as I see it, in which the employee does not seek payment, yet which would not fail for lack of mutuality or absence of consideration. Under such a contract an employee could owe a duty to carry out whatever work he or she had agreed to do; and the employer would have to fulfil obligations which might not involve the payment of money, e.g. the provision of tools and equipment or the taking of reasonable care for the employee's health and safety. Money is not the only consideration which may move from an employer under a contract of employment…”

He dismissed the appeal, finding in favour of Mrs Knight, that it was down to the Employment Judge on the evidence to reach the conclusion that Mrs Knight had not brought her contract of employment to an end, but had simply chosen not to enforce her entitlement to pay in order to keep the company afloat. Her claim for redundancy pay was allowed.

Comment

It is interesting to how just many websites appear to categorically state that sole directors are not entitled to redundancy pay. In Employment Status: directors we consider the various issues and look at case law in this area affecting SME owners.

The National Minimum wage may be something to consider in cases where a director who is employed under a contract of remuneration waives their entitlement to pay.

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