Company directors who save on tax by accepting a modest salary and remuneration by dividend could be in for a nasty shock if they ever come to claim compensation.
A company director had his compensation capped to £9,254 annual earnings with dividend income entirely excluded from consideration, in a landmark decision at Manchester Employment Tribunal. If the income from the dividend had been included, he would have been awarded £74,000 in compensation.
In Sheridan v GTECH Solutions Ltd, the tribunal refused to acknowledge the dividend of the director/shareholder. Instead, it calculated a cap of one year’s earning, in line with s 124(1ZA) of the Employment Rights Act 1996, by reference only to the claimants PAYE salary of £756 per month.
Ian Procter, solicitor advocate and partner at Green Solicitors, who represented the employer respondent, says: “This is a landmark decision and although coming at first instance will be very persuasive to other tribunals due to its careful consideration of the law and extensive and detailed judgment.
“It is thought to be the first time this issue has been raised before an employment tribunal following the introduction of the cap recently and the tribunal accepted my submission, that ‘for the purpose of calculating the statutory cap earnings did not include dividends but only PAYE earnings, as only they were contractually due under the contract of employment. Further a dividend arises as a result of an individual’s status as shareholder and is not payable by the company as of right or as a result of employment’.”
