Our thoughts on the world of employment law - and beyond.

All work and no pay - but still an employee anyway

Many reports of the EAT decision in Secretary of State for Business, Innovation and Skills v Knight (UKEAT/0073/13) have trailed it as a departure from the established Ready-Mixed Concrete principles around employment status (ie, the three ‘irreducible minimum’ precepts:- the provision of work in return for pay; control of ‘servant’ by ‘master’ and the other features of the arrangement being consistent with a contract of service).  Indeed, on the face of it, the decision does seem to move away from the first of those principles: Mrs Knight was held to be an employee despite receiving no pay for two years.  But a closer look at the facts of the case suggests it is perhaps not quite the departure from the norm that it might at first appear.

Mrs Knight was MD of RSS and was the sole shareholder.  RSS became insolvent and Mrs Knight applied for a redundancy payment from the National Insurance Fund. BIS (operators of the NIF) maintained that she was not an employee and therefore had no entitlement to a redundancy payment on insolvency.  It pointed out that though she did have a contract (entered into shortly after RSS started trading), it had never been formally executed, referred to working hours which differed from those she actually worked and provided for a salary of £20,000 - which she had only taken when the company was operating satisfactorily.  In the final two years of trading, she had not received a salary at all, in an effort to keep the company afloat.

The tribunal and the EAT found that she was, nonetheless, an employee.  The relevant issue was whether an employment contract was in place at the time the company ceased trading.  BIS argued that when Mrs Knight relinquished her entitlement to pay, she accepted a variation to her contract which ended her employment status.  The EAT found that there was a clear difference between the scenario where she chose to forfeit her contractual entitlement to pay, and the situation in which she agreed with the company that no salary was payable. In the latter case, there would have been a variation in contract such that she would have remained unpaid even if the company did have the means to pay her - and the EAT found that an improbable intention.  In other words, she was still employed even if she did not take the salary to which she was contractually entitled.  That was different from giving up a right to salary altogether, which would have impacted on her status thereafter.

Furthermore, the EAT did not accept the argument that there was an absence of mutuality in the latter two years of the contract, meaning that there was no employment contract - or indeed, a lack of consideration, which meant that there was no contract at all.  The facts suggested otherwise.  The EAT found that ‘there may be a contract of employment… in which the employee does not seek payment, yet which would not fail for lack of mutuality or absence of consideration’.   Money is not, said the EAT (interestingly, but obiter), the only consideration which may indicate a contract of employment.  Indeed, the provision of equipment or the taking of reasonable care for the employee’s health and safety could in theory constitute alternative forms of consideration. These are interesting comments but were not explored in any detail, and since they were made obiter, we should think carefully before abandoning a salary structure in return for the provision of yoga and meditation lessons.

What the decision does clarify is that if an individual is entitled to pay but chooses not to take it, they may still be an employee - notional, rather than received pay is sufficient consideration.  This will have implications beyond an insolvency situation, because the same definition of employee is used to determine entitlement to the full range of general employment rights.  Charities, however, should not start to panic about an extension of the rights of volunteers - provided there is no obligation on a volunteer to work, or a right to remuneration in the first place, then the relevant mutuality of obligation for employee status remains highly unlikely to be established.

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