The claimant was employed by Saville Tractors (Belfast) Limited on 20 November 1989 as a management accountant under a contract of employment. In 2008 he became a 50% shareholder as the owners were retiring. When the company ceased trading due to an unpaid VAT bill, Mr Morgan claimed a redundancy payment, notice pay, holiday pay and arrears of wages of £267.31 under insolvency provisions. The Department for Employment and Learning resisted the claim, believing Mr Morgan was not an employee in law and therefore not entitled to those payments from the state if his 'employer' could not afford to meet them. The original employment tribunal found for the claimant (the NICA found that the outcome of the review was that the Tribunal concluded that the claimant received dividends as an alternative way of receiving his remuneration for services rendered or to be rendered at his election; that the payment by way of dividends was intended from the outset to be remuneration and the contract quite clearly stated so) and the Department appealed to the NI Court of Appeal.

Being a Director, the claimant's contract had a large degree of flexibility. For example, one clause stated, “The employee is entitled to take remuneration as dividend instead of salary if he so wishes”. He did so wish and the amount of salary in relation to dividend was tiny within his £69k remuneration package. 

However, many other clauses within the contract referred to him as an employee and he was restricted in some regards in relation to holiday entitlement and notice of same. The contract also contained provisions about termination and notice periods, summary dismissal, disciplinary and grievance procedures, pensions and other obligations including post-termination obligations.

The NICA considered the dividend v salary conundrum: "Ultimately, the question remains as to the basis on which the claimant received the payment. When the recipient of the payment is a director and a shareholder and the Tribunal is required to determine whether the recipient is also an employee, the issue for the Tribunal remains whether the payment was for services rendered under a contract of employment and the focus remains on the basis on which the payment was made... There may be tax issues arising from receipt of remuneration as dividends rather than through PAYE. That is a matter for the revenue authorities. However the tax implications of the claimant’s contractual arrangements are a different issue."

The appeal was rejected.
http://www.bailii.org/nie/cases/NICA/2016/2.html 

Practical lessons

It’s clear that the actual ‘basis’ upon which the payment was received here holds the key to the conundrum mentioned above. But how is that basis identified? 

Attention should be focused on the character of the receipt in the hands of the recipients. This, as recognised by the court, is a question of fact which will inevitably vary from case to case. 

The authority of Eyres v Finnieston Engineering Company Ltd[1916] 7 TC 74, which was advanced by the appellant to support the contention that a shareholder who received dividends did not receive remuneration, did not establish any firm principle. The Court of Appeal is saying here that dividends on shares may be received as remuneration for an employee if they were made for services rendered by employees on foot of a contract of employment. 

Is there a hard and fast rule? Simply, there isn’t. In Eyres, whilst the Articles of Association stated that dividends on shares held by directors were to be regarded as remuneration, the Court of Session held that that was not in fact the reality. The Court of Appeal here is echoing the already established principle that substance should prevail over form and the ‘basis’ on which payments are received remains fact sensitive and has not been constrained by any fixed principle.

NI Tribunal decisions are available on the OITFET website:
http://www.employmenttribunalsni.co.uk/