A recent ruling by the Court of Appeal has determined that there is no fundamental reason why a director and shareholder of a company can not also be an employee of that company and benefit from the legal rights afforded to all employees.

The effects of this case could be wide-ranging, as it means that directors of this kind, even if they are controlling shareholders, could qualify for compensation from the National Insurance fund should their company become insolvent.

The case in question concerned two director/shareholders from different companies. They both received salaries and paid tax and national insurance contributions as employees and stated that they had an oral contract of employment with their respective organisations.

Both had given personal guarantees regarding company business, and one had even given a personal loan to his company.

Each company was later declared insolvent, and, under the Employment Rights Act 1996, the two directors were judged by an employment tribunal not to be entitled to redundancy payments or any other form of National Insurance compensation.

They appealed this decision to the Employment Appeal Tribunal, who rejected the original decision and deemed that the two could indeed be classed as employees. In order to clarify this important point of law, the Secretary of State for Business, Enterprise and Regulatory Reform took the two cases to the Court of Appeal.

After considering the case, the Appeal Court Judges ruled that there is no reason in principle why a shareholder or even a controlling shareholder cannot be an employee under a contract of employment to their own company.

However, the court also stipulated that certain conditions would have to apply for the director to be considered an employee. The contract of employment must be proved to be genuine, and inquiries undertaken to determine what kind of work the director had carried out as an employee, and whether they were actively working as an employee at the time of the insolvency.

Whether the director had a controlling influence in the company and the extent of their personal financial involvement in the organisation would ordinarily have no relevance to the question of whether they could be treated as an employee or not.

This ruling has the potential to influence a great number of future cases, as roughly 12.000 directors made similar claims to the National Insurance Fund in 2008, and the number of companies being made insolvent looks certain to increase as the recession wears on.

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