Federation of Small Businesses now aware of directors being rejected by the RPS

Please find below the following letter content sent to the Federation of Small Businesses (“FSB”) to inform them of the recent Redundancy Payment Policy to reject director applications on employment status. The FSB will now be meeting the RPS with a view to establishing their own understanding of the situation.

Re: Wholesale rejection of Director redundancy awards from the Redundancy Payments Service (“RPS”)

I would like to bring to the FSBs attention and the attention of your members a significant change in policy by the RPS (part of the Insolvency Service, Department for Business, Energy and Industrial Strategy (“BEIS”)) to wholesale reject directors redundancy applications on legal technicalities concerning employment status. This has and will affect many of your members personally at a time when they may need all the financial support available to them as a result of their company failing.

You may or may not be aware, but an employee’s employment rights are protected by the Employment Rights Act 1996 (“ERA 1996”) in the event of a company becoming insolvent and being unable to pay any of the following:

• Redundancy
• Arrears of pay
• Unpaid holidays
• Notice pay

Employees can apply to the RPS for an award from the National Insurance Fund (“NIF”). The RPS effectively step into the shoes of the insolvent company and pay (subject to certain caps) the monies contractually owed by the company to the employee.

The ERA 1996 states that to claim from the RPS the individual has to be an employee of the company. This is a technical legal grey area for directors because a director can be just an office holder or could effectively be self-employed despite having a Limited company and is not always an employee. None the less the case law containing the tests to establish if a director is an employee is very clear. It concerns the following:

• Is there mutuality of obligation – did they perform work and where they paid for it
• Was there a ‘contract of service’ and not a ‘contract for services’ – a master/servant relationship
• Did they have an employment contract – implied, verbal or written
• Did they get paid holidays
• Did they get sick pay
• Where they on payroll and paid regularly
• Did they work regular hours
• Where they in the company pension scheme
• Did they have grievance and disciplinary policies

I would hope you would agree that the above list would suggest that the majority of directors and therefore your members would qualify as director employees and would qualify for a successful award from the RPS.

The RPS up until September last year where not disputing whether a director was an employee and applications made by directors were being paid without question. Since September last year rejections of director applications have steadily grown to the point today that nearly every single application is being rejected. Thousands of directors, many of which could be your members, are being refused vital financial awards as their companies fail.

The issue which has prompted this reversal of policy to pay directors is the payment of National Minimum Wage (“NMW”).

The first thing the RPS have to assess is employment status as an employee. Once this is agreed the next question is what gross weekly pay rate the application should be paid at. If a director is an employee (and most are in practice) then under the NMW Act as an employee, they should be paid at NMW rates multiplied by the hours they worked. The RPS has formally stated in publications that claims would be uplifted to NMW and for the last five years they have honoured this.

Directors often take advice from accountants to pay themselves through PAYE up to the threshold for tax and national insurance to take advantage of dividend discounts. This effectively means they are paying themselves below NMW. Up until recently he RPS have always uplifted director applications to NMW.

Uplifting a claim to NMW results in a much larger award for the director and it is clear that the RPS are now enforcing a policy to challenge employment status to reduce the impact of director awards on the NIF. This seems particularly unfair when:

• Assessing a technical legal grey area via a volume application process has resulted in random, inconsistent and unjust rejections – frontline RPS staff are not technically capable of making these decisions
• Directors are told on rejection to go to employment tribunal which has the following issues:
  - The tribunal process is long and complicated
  - Directors are disadvantaged unless they can afford legal support (legal support normally costs more than the award itself so is commercially unviable)
  - Tribunal decisions are subject to the judge on the day and decisions are inconsistent at best
  - It is stressful and many directors just give up
• The majority of directors are also employees and given the points above the RPS can act with relative impunity

My company have been helping directors claim redundancy from the RPS correctly and within the legal framework for nearly 6 years. We are FCA regulated and take our regulation very seriously. Despite many attempts to engage with the RPS they have refused. On receipt of multiple rejections, we have attempted to support directors at tribunal and to date have had three hearings (there are over 200 further cases in the pipeline). The results of which are noted below:

• Hearing 1 – the director suffered with anxiety and the judge decided that his evidence could not be relied on – the decision was he was not an employee
• Hearing 2 – the director was found to be an employee and an award was made
• Hearing 3 – the director was found not to be an employee

All three cases were practically identical (sole director shareholders, no written contract of employment, paid holidays, paid sick pay, on PAYE rates below the threshold for tax and NI) yet the results from the tribunals were inconsistent.

Although these tribunal results do not set a precedent the RPS are now extracting what they want from them to best justify their change of policy. In fact, the situation seems to be worsening for directors with the RPS now suggesting:

If a director takes dividends, they cannot be an employee – this is not defined in any case law and contradicts Hearing 2 above (the director was deemed an employee and he took dividends)
If a director did not pay himself through PAYE NMW or above, he cannot be an employee – this is just one issue amongst many considerations to determine employment status

I apologise in advance for the length of this email but we could really do with some support to bring some political pressure on the policy makers to look into what the RPS are doing. It does seem ironic we have a new prime minister who extols the virtues of directors being the backbone of the economy yet when they need the governments support the most, they are being refused redundancy and other statutory rights over legal technicalities which because of the prohibitive legal costs of going to tribunal they cannot even challenge.