Company directors and controlling shareholders may now be eligible for statutory redundancy payments should their businesses go bust – if they can prove they were employees.

The Court of Appeal ruled recently, in the case of Berr v Neufeld, that controlling shareholders can be treated as employees. The outcome of this case is that the National Insurance (NI) fund has to pay them redundancy, notice and other payments if the company becomes insolvent.

Employees can file claims for statutory redundancy payments from the NI fund if their employer becomes insolvent. Previously, the courts were undecided as to whether employees were eligible for these payments if they were also controlling shareholders.

Some 12,000 such claims by directors of companies that folded were made on the fund last year.
The Berr v Neufeld case involved two controlling shareholders and directors. When the companies they worked for became insolvent, they claimed to be employees and therefore entitled to a government payment under the Employment Rights Act. The court upheld their claim that they were employees.

However, the court ruled that controlling shareholders would not be employees if the company were a sham (simply the alter ego of the individual), the employment contract was entered into for an ulterior purpose (for example, purely to gain the redundancy payment), or where the individuals concerned did not conduct their relationship in accordance with the employment contract.