Download Contract not illegal in the absence of misrepresentation

Key cases
Contract not illegal in the absence of misrepresentation
Enfield Technical Services Ltd v Payne; Grace v BF Components Ltd, EAT
The doctrine of illegality did not apply to prevent two employees, who had claimed
to be self-employed in order to minimise their tax liability, from claiming unfair
dismissal. Although the employees had wrongly characterised their employment
relationships, they had done so in good faith; and in the absence of a
misrepresentation or an attempt to conceal the true facts, there was no illegality.
It is well established that an employee may be
prevented from asserting his or her
contractual or statutory employment rights
where his or her employment contract is
tainted with illegality. In Hall v Woolston
Hall Leisure Ltd (Brief 664) the Court of
Appeal explained that illegality would
certainly render a contract unenforceable in
two types of case: first, where the contract
was entered into with the intention that an
illegal act be committed; and second, where
the contract was prohibited by statute. The
Court went on to identify a third type of case
in which a party might be prevented from
enforcing a contract. This is where the
contract, though lawfully made, was ‘illegally
performed and the party knowingly
participated in that illegal performance’.
In the two cases below, the EAT considered
whether arrangements in employees’ contracts
– which had the effect of presenting
inaccurately to HM Revenue and Customs that
the employees were self-employed – rendered
the contracts illegal. If so, the employees would
be prevented from proceeding with their claims
for unfair dismissal under the Employment
Rights Act 1996.
‘Sub-contractor’ was employee
In the first case, Payne, P began working for
ETS Ltd under what was termed a ‘subcontractors contract’. This included an
undertaking on the part of P that he would
only work for ETS Ltd. The Revenue made
enquiries as to P’s employment status for tax
purposes, and determined that, although the
matter was finely balanced, it was willing to
treat P as self-employed. He was dismissed in
2006 and claimed unfair dismissal. An
employment tribunal found that P had been
an ‘employee’ of ETS Ltd for ERA purposes
for the duration of his contract, meaning that
he had unfair dismissal rights. ETS Ltd
countered by arguing that the contract had
been illegal, and was thus unenforceable.
Contracts of
employment
Rejecting this argument, the tribunal noted
that the dividing line between employed and
self-employed status was blurred, and that
the matter is rarely cut and dried. That being
‘in our judgment there must be some form of
misrepresentation, some attempt to conceal the true facts of
the relationship, before the contract is rendered illegal’ – Elias P
so, there was nothing inherently illegal in the
parties’ presenting facts to the Revenue which
supported the contention that P was selfemployed. ETS Ltd appealed to the EAT.
Request to remain self-employed
In the second case, Grace, G began working for
BFC Ltd in a self-employed capacity in June
2002. He submitted invoices for gross pay and
paid his own tax and NI contributions. Though
he did not receive holiday or sick pay, he
attended BFC’s offices regularly and worked
exclusively for them. After ten weeks BFC Ltd
requested that G work for them on a salaried
basis, but he refused owing to the drop in
income that would result. In August 2003 BFC
Ltd told G that he would henceforth be treated
as an employee, as this was how he would be
regarded by the Revenue. It threatened to
dismiss G unless he accepted this change,
which he did, reluctantly, on 15 September. G
was dismissed in January 2004, and claimed
unfair dismissal.
A tribunal found that G had, in fact, been an
‘employee’ for ERA purposes throughout his
time with BFC Ltd. It found further, however,
that G’s contract of employment was illegal
before 15 September 2003. Prior to that date,
G had known of and participated in an
agreement which meant that the payment of
tax was delayed, and had retained his
supposed self-employed status despite being
given the option to enter into a contract of
employment.
Accordingly,
his
unfair
dismissal claim could not proceed. The
tribunal went on to hold that, even if this
i Employment Law Brief 836 • September 2007
9
Key cases
analysis was wrong, the fact that in August
2003 G was made aware of BFC Ltd’s need to
make tax and NI deductions, but continued
to work as self-employed for a further three
weeks, rendered those three weeks a period of
illegal performance. This broke G’s
continuity of employment, meaning that he
did not have the one year’s continuous service
required to pursue an unfair dismissal claim.
G appealed to the EAT.
EAT reviews doctrine of illegality
Considering the two cases together, the EAT
began by noting the development of the
doctrine of illegality; in particular, the three
‘there is no reason why public policy should penalise an
employer or employee for getting the law wrong’ – Elias P
categories identified in Hall v Woolston
Leisure Services Ltd. It observed that the third
category – where the contract, though
lawfully made, was ‘illegally performed and
the party knowingly participated in that
illegal performance’ – was relevant to both
cases, and made the following points with
reference to case law:
!
!
Case references
Enfield Technical
Services v Payne;
Grace v BF
Components Ltd.
EAT, 25.7.07 (0644/06;
0367/06).
Hall v Woolston Hall
Leisure Ltd. Court of
Appeal, 2007 ICR 99.
10
to ‘knowingly participate’, the employee
must have knowledge of the facts that
render performance of the contract illegal.
However, it is irrelevant whether the party
appreciates that what he or she is doing is
illegal. Ignorance of the law is no excuse
the concept of ‘participation’ requires
active participation. The Court of Appeal
in Hall doubted that knowledge of
illegality coupled with a failure to do
anything about it – in that case, a matter of
the employee knowing that her employer
was deceiving the Revenue – is in itself
sufficient to amount to ‘participation’ for
the purposes of this test.
Having examined the body of case law
concerning illegality, employee status and the
Revenue, the EAT stated that the ‘essential
feature’ of the cases where illegality was found
was that the parties entered into arrangements
which, to their knowledge, misrepresented the
facts of their employment relationships. In no
case was a contract held to be illegal where the
parties, in good faith and without
misrepresentation, wrongly characterised their
relationship, leading to the wrong tax regime
being adopted. From this the EAT concluded
that, for a contract to be rendered
unenforceable due to illegality, it is not enough
that arrangements have the effect of depriving
the Revenue of tax to which it was entitled.
First, ‘there must be some form of
misrepresentation, some attempt to conceal
the true facts of the relationship’.
Lack of misrepresentation crucial
Dealing first with the Payne case, the EAT
found it plainly evident that there had been
no misrepresentation of any kind. There was
no reason in public policy to penalise an
employer or employee for getting the law
with regard to employment status wrong,
particularly as lawyers may reach different
conclusions on the same facts. Accordingly,
the tribunal had been correct in finding that
there was no illegality in the contract.
Turning to Grace, the EAT again found that
the crucial element in finding illegality – a
misrepresentation or attempt to conceal the
true facts of the relationship – was missing.
The tribunal had found that, during the three
weeks after BFC Ltd had told G that it
regarded him as an employee, and before G
agreed to become one, G knew that his
employment status was wrongly described.
The EAT, however, noted that at this time G
simply knew that BFC Ltd was representing
him as an employee. His taking three weeks
to consider the company’s new position on
his employment status could not be said to
amount to a misrepresentation of the facts of
the relationship. It followed that the doctrine
of illegality prevented neither G nor P from
proceeding with their unfair dismissal claims.
Comment
The EAT’s decision provides useful guidance
for tribunals which find themselves dealing
with one of the more complex areas of the
law of contract. It is now clear that, in
determining whether a contract is illegal, a
tribunal should not seek to penalise an
employer or employee for getting the law
with regard to employment status wrong, but
only
for
committing
an
act
of
misrepresentation or deceit. While it may be
natural for a tribunal to disapprove of an
arrangement which had the effect of
depriving the Revenue of tax to which it was
entitled, the EAT re-emphasised that the
Revenue can require the repayment of any tax
which has been withheld as a result of a
wrongly characterised relationship.
i Employment Law Brief 836 • September 2007