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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