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On 25 July 2007 the EAT handed down judgment in an important decision concerning the effect of the common law doctrine of illegality in cases of unfair dismissal. Marcus Pilgerstorfer acted for the two employers.
Previously,
Hall v. Woolston Hall Leisure Services Ltd [2000] IRLR 578 (CA) set out the test for when a contract of employment, which was perfectly lawful when made, could become tainted with illegality (and therefore unenforceable) through its illegal performance. Both knowledge of and participation in the illegal performance is required. In the present appeals, EAT’s judgment has considerably softened the approach and has focused on whether or not the employee in question misrepresented the facts.
In both of the cases before the EAT, there was at least a period of time in which the employee in question had behaved as if he had been a self-employed worker. Contrary to the statutory provisions concerning payment of tax and national insurance, the employee had not had PAYE deductions made from his pay and employer and employee class 1 National Insurance Contributions had not been paid. Instead (in
Grace) self-assessment tax returns were completed and tax paid at a much later date, and (in
Payne) the Construction Industry Scheme of deductions was operated. In both cases, it was the employee in question who insisted on maintaining or entering into the self-employed arrangement.
The employers argued that the employees’ claims of unfair dismissal should be dismissed due to the contract having been tainted with illegality through illegal performance. In accordance with
Hall v. Woolston Hall Leisure Services Ltd [2000] IRLR 578, the employers argued that because there was illegal performance of the contract and because the employees both (i) had knowledge of the underlying facts of the arrangement and (ii) participated in the arrangement by insisting on the self-employed arrangement, the claim should be barred. Reliance was placed on a number of authorities including
Hall,
Salveson v. Simons [1994] IRLR 52 and
Daymond v. The Enterprise South Devon UKEAT/005/07.
In a lengthy judgment, the EAT reduced the width of the dicta in the previous case law, in particular in
Daymond. The EAT took the view that it was an essential feature of the cases where there had been found to be illegality that the parties knowingly entered into arrangements which to their knowledge represented the facts of the employment relationship to be other than they really were. Thus, according to the EAT, it is essential that there must be some form of misrepresentation, that is some attempt to conceal the true facts of the relationship, before the contract can be rendered illegal and a claim for unfair dismissal to fail. Where parties have “in good faith and without misrepresentation wrongly characterised their relationship with the result that the wrong tax regime was adopted” the illegality doctrine would not apply.
Permission is being sought to appeal to the Court of Appeal on grounds that the judgement wrongly adds a gloss to the test of "knowledge" and "participation" as set out in
Hall. |
