The Court of Appeal in Northern Ireland has dismissed an appeal by the Department for Employment and Learning in relation to an Industrial Tribunal Decision in which a director and shareholder of a limited company paid in dividends was also deemed an employee and therefore eligible for payment by DEL of his redundancy pay of £9,460.00, notice pay of £5,160.00, holiday pay of £2,150.00 and arrears of pay of £267.31 when the Company ceased trading due to insolvency.
The central issue in this appeal (The Department for Employment and Learning v Richard James Morgan  NICA 2) was whether the receipt of payment in the form of dividends was incompatible with an employment relationship. DEL contended that payments made in the form of dividends to a person who could elect whether to receive payment by way of dividend was not compatible with that person having the status of an employee.
The Claimant had a 50% of the shareholding in the company and had also entered into a written contract of employment. Under the Claimant’s contract of employment he was described as an employee director who reported to the Board receiving £69,500 per annum. From October 2006 to July 2012 the claimant was paid under PAYE (£6,000 and then £3517.68) with a dividend making up a total gross payment of £69,500. From July 2012 to February 2013 the claimant was paid £69,500 gross under PAYE. The change to PAYE occurred at the insistence of the company’s bank. The Court noted that it was apparent throughout the period that the total payment was intended to reflect the salary of £69,500 stated in the contract. The stated payment did not depend on the profitability of the company. The dividends were declared to achieve the stated payment regardless of the profitability of the company. Whilst there may be tax implications arising from receipt of remuneration as dividends rather than through PAYE, that is a matter for the revenue authorities. For employment law purposes and specifically Mr Morgan’s eligibility for payments from the National Insurance Fund, the Tribunal was correct in its determination that Mr Morgan was an employee. Looking at the substance and not the form of the money received by Mr Morgan, the so-called dividend was in reality an emolument for services rendered by the claimant to the company and therefore should be treated as salary.
When the recipient of a remuneration 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 and not the form of payment.