Industrial Tribunals Northern Ireland Decisions

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Cite as: [2014] NIIT 200_14IT

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THE INDUSTRIAL TRIBUNALS

CASE REF: 200/14

CLAIMANT: William Beattie

RESPONDENT: Damien Purcell t/a Dee’s Exhausts

DECISION ON A PRE-HEARING REVIEW

The decision of the tribunal is that:-

The claimant’s contract of employment was tainted with illegality and is unenforceable. The claimant’s claims of unfair dismissal and/or breach of contract must therefore be dismissed.

Constitution of Tribunal:

Employment Judge (sitting alone): Employment Judge Drennan QC

Appearances:

The claimant appeared in person and was not represented.

The respondent was represented by Mr D Deazley, Solicitor, of Higgins Hollywood Deazley, Solicitors.

Reasons

1.1 The claimant presented a claim to the tribunal on 28 January 2014, in which he made a claim of unfair dismissal and/or breach of contract. The respondent presented a response to the tribunal on 28 February 2014, in which it denied liability for the said claims and claimed, inter alia, by way of defence that the claimant’s contract of employment was tainted by illegality and therefore was unenforceable.

At a Case Management Discussion on 31 March 2014, an Employment Judge directed that a pre-hearing review would take place on 15 April 2014 to determine the following issue:-

“Whether or not the tribunal has jurisdiction to hear the claimant’s claims of unfair dismissal and breach of contract, having regard to the allegation that his contract of employment with the respondent was an illegal contract of employment.”

1.2 At hearing to determine the said issue, the claimant appeared in person and was not represented. At the commencement of the hearing, I confirmed with the claimant that he understood the issue to be determined at this hearing and, in particular, I reminded him that it was not my function at this pre-hearing review to determine whether or not he had been unfairly dismissed and/or there had been a breach of his contract of employment. In light of the issue to be determined by the tribunal at this pre-hearing review, I initially had to determine whether it was for the claimant or the respondent to proceed first to give any evidence in relation to the said issue; however, during the course of discussion, the claimant, without warning and explanation, walked out of the hearing and, despite requests to do so, refused to remain in the hearing room and he immediately left the tribunal building and failed to return. In the circumstances, I proceeded to determine the issue, the subject-matter of this pre-hearing review, in the absence of the claimant.

1.3 At this hearing, I heard oral evidence from the respondent, together with oral submissions by the respondent’s representative. In the circumstances, as set out above, the claimant did not give any evidence to the tribunal. However, as set out elsewhere in this decision, I considered the contents of the claimant’s claim form presented to the tribunal on 28 January 2014, insofar as relevant to the issue to be determined at this pre-hearing review, pursuant to Rule 19 and 59 of the Industrial Tribunals Rules of Procedure 2005, as amended.

2.1 I made the following findings of fact, relevant to the issue to be determined at this pre-hearing review, as set out in the following sub-paragraphs of this decision.

2.2 The claimant was employed by the respondent as an employee carrying out the work of an exhaust fabricator/fitter from on or about 7 May 2007 until on or about 4 January 2014. Damien Purcell, who trades as Dee’s Exhausts, is the sole proprietor of the business, which makes and fabricates car exhausts, fits car exhausts and/or repairs car exhausts. At the time of the termination of the claimant’s contract of employment on or about 4 January 2014, the respondent had five employees, including the claimant. One was a part-time book-keeper, who was responsible for the preparation of the wages and pay-slips and for calculating relevant deductions of tax and national insurance under the PAYE scheme. The claimant was not provided by the respondent with a written contract of employment. He worked four and a half days per week (36 hours) and was paid weekly. By the time of the termination of his employment, at the end of each week, the claimant received a pay-slip which indicated that he was paid approximately £141.00 net each week. The respondent did not keep copies of these pay-slips and could not recall the exact figure. It was a matter of ‘pence’ over £141.00, as he recalled. The respondent accepted that the figure on the pay-slip was meant to represent what was being put through the ‘books of the business’ for the claimant; but he agreed, in evidence, that it was not an accurate representation; and he believed the claimant would have known that, as he was in receipt of further monies from the respondent, as set out later in this decision. The respondent further stated that, prior to 2009, the claimant had been paid properly and accurately by the respondent, with all relevant deductions properly made by him, in relation to tax and national insurance under the PAYE system. In 2009, for a short period of approximately six weeks, the claimant, together with the other employees, had to go on a three day week. Following the end of the three day week, the claimant returned to his normal four and a half day week (36 hours). The claimant spoke to the respondent and, after explaining he was ‘struggling to make ends meet’ due to his partner having health problems, he requested the respondent to pay him £125.00 per week, by way of direct debit, into his bank account, and the balance of his earnings to be paid, by way of ‘cash into his hand’. At that time, the balance cash figure was approximately £155.00 - £160.00; but this figure has gradually increased over the subsequent years, so that by the date of termination of the claimant’s contract of employment the claimant was receiving £170.00 ‘cash in his hand’. The figure of £125.00 paid into the claimant’s bank account has not altered during the subsequent years. The respondent agreed to enter into this arrangement, as requested by the claimant. I am satisfied, on the unchallenged evidence of the respondent, although he cannot remember at this stage the precise words that were used by the claimant, that, when entering into this arrangement, both the claimant and the respondent knew and fully understood that the said cash payment would not be going through ‘the books’ of the respondent and it would also not be subject to relevant deductions by the respondent of tax and national insurance, as required, under the PAYE system. The book-keeper was not made aware of this arrangement by the respondent, who paid the said cash payment himself to the claimant. In his claim form, at Paragraph 6.5, the claimant confirms that the respondent paid him £125.00 per week into his bank account and £170.00 cash in his hand. The claimant received, from the respondent, a P60 end of year certificate for the tax year to 5 April 2012, which stated that he was in receipt for the said year of £7,119.32. He also was in receipt of a P60 end of year certificate for the tax year to 5 April 2013 which stated that he was in receipt of £7,273.50. The claimant would have been aware, by the terms of the said certificate, that the certificate, which was required to be sent to the relevant tax authority (HMRC), was inaccurate, given that his weekly earnings paid to him by the respondent each week were £295.00 per week. This was not reflected in the figures set out in the said certificate. He also received a pay-slip, giving his earnings as £141.00 net per week (approximately), which again he knew was inaccurate, as set out previously.

2.3 In his claim form, the claimant stated, inter alia:-

“ ... I cant be sure how much I am owed as Damien wud [sic] never officially put me thru [sic] full time as Im aware he had me part-time on his books even tho [sic] I constantly asked to be paid official and properly he never did so proving what I was actually paid may be difficult though I can provide bank statements.”

In the absence of the claimant, as set out above, I put what was stated by the claimant in his claim form, referred to above. In response, the respondent denied, in evidence, that the claimant had ever made such a request to regularise the situation and, in particular, for all payments made by the respondent, as set out above, to be put properly through the books and for all such payments to be properly the subject of all relevant deductions by way of tax and/or national insurance under the PAYE system in respect of all payments made to him by the respondent. In light of the foregoing, I therefore have concluded no such request was made by the claimant, as alleged in his claim form.

3.1 The common law doctrine of illegality is one that has a long history. It has been applied to contracts of employment with the result that contractual rights have been rendered unenforceable. Early on in the development of the law relating to unfair dismissal, the question rose as to whether an employee’s statutory rights under the legislation could be vitiated by the existence of an illegal contract. In Tomlinson v Dick Evans U Drive Ltd [1978] ICR 639, the Employment Appeal Tribunal applied the doctrine of illegality to the statutory right of unfair dismissal on the ground that the statutory right depended on and arose from a contract of employment. The Employment Appeal Tribunal held that, where the contract of employment was illegal, the statutory right would not be enforced. Thus, and where a contract of employment is found to be tainted with illegality, then any claim for breach of contract, but also unfair dismissal, is unable to be enforced.

3.2 The Court of Appeal in Northern Ireland recently reviewed the law on illegality in Delaney v McMahon [2013] NICA 65 and also in the case of McGlinchey & Others v McGurk & Moore (T/A McGurk & Moore) [2014] NICA 3.

In Delaney, the Court of Appeal set out the relevant legal principles, namely:-

“[10] In Enfield Technical Services v Payne [2008] ICR 30, Elias J conducted a comprehensive review of the cases where the contract was lawful when made but had been illegally performed and the issue was whether the party seeking the assistance of the court had knowingly participated in the illegal performance. The concept of participation has given rise to some difficulty. This was addressed in Hall v Woolston Hall Leisure Ltd [2001] ICR 99. In that case the claimant agreed that she would be paid £250 net per week. She was provided with payslips which showed that her tax and national insurance payments were calculated on the basis of a gross wage of £250 per week. She was, therefore, aware of the misrepresentation and raised it with the employer but was told that was the way the employer did business. The court held that these circumstances showed acquiescence in the employer’s conduct but reflected the reality that she could not compel her employer to change his conduct.

[11] The appellant submitted that the cases of Newland v Simons and Willer (Hairdressers) Ltd [1981] IRLR 359 EAT, Hewcastle Catering Ltd v Ahmed [1991] IRLR 473 and Wheeler v Quality Deep Ltd (trading as Thai Royale Restaurant) [2005] ICR 265 showed that the contract in the present case was illegal. Hewcastle is of no assistance to the appellant as the VAT fraud was ancillary to the employees’ employment and not a direct consequence of their contracts of employment. Wheeler was a case in which Hall was applied. The Court of Appeal allowed the appeal because it concluded that although the employee and her husband must have known that something was wrong and they chose to acquiesce in the employer’s illegal activities, that was not sufficient to establish participation.

[12] Newland was a case in which the employee was a hairdresser who was paid a weekly cash wage. The employer falsely recorded a lower amount in the wages book in order to defraud the revenue. The employee initially believed that tax and national insurance were being properly deducted but as a result of receiving her P60 the Tribunal found that she knew of or ought to have known of the failure to pay the appropriate tax and dismissed the claim. The EAT allowed the appeal on the basis that the Tribunal could only dismiss the claim if the employee knew of the fraud. The case does not mention the concept of participation and the majority considered it sufficient to debar the claimant that she knew of the illegality but continued to accept payment. This case is not consistent with the clear line of authority set out by Peter Gibson LJ in Hall requiring participation and Mance LJ doubted the reasoning and the outcome in Newland in his concurring judgment in Hall. We consider that the correct legal principles were set out in Hall, that Newland is inconsistent with those principles and that its reasoning should not be followed.”

In a recent case of Pickard v Lynn Hughes (t/a the Tanning and Beauty Kabin) [2011] UKEAT/0185/10, Mr Justice Underhill, as he then was, stated:-

“7. The law in this area has recently been clarified by the decisions of the Court of Appeal in Hall v Woolston Hall Leisure Ltd [2001] ICR 99 and Enfield Technical Services Ltd v Payne [2008] ICR 1423. I need not analyse their effect in any detail. This is a case in the third category identified by Peter Gibson LJ in Hall (see paragraph 32) - that is, a case where any illegality consists in the way in which the contract on which the claim is based has been performed. The issues therefore are (a) whether the contract was indeed being illegally performed; and (b) whether the Appellant voluntarily participated in that illegal performance.

8. As to (a), the illegal performance relied on by the Judge was the non-payment of tax to the Revenue on the Appellant's earnings. The first step in the analysis must be to identify with more precision what the breach of obligation which that involved was and, more particularly, whose breach. If the Appellant was employed under a contract of service, the breach was the Respondent's, because it was her obligation to pay the tax under PAYE. If, by contrast, the Appellant was employed under a contract for services the breach was her own.

9. The Judge makes no express finding on this question, but the necessary implication of paragraph 8(a) of the Reasons is that he believed that the Appellant was in fact an employee. Although it would have been better if he had spelt out his reasoning on that point more fully, it is clear that that is a conclusion to which he was entitled to come. It is indeed prima facie the obvious conclusion in the case of an employee who has been working apparently full-time, and on a permanent basis, in the capacity that the Appellant appears to have been working. It seems to me that the Judge was also plainly entitled to find that the Respondent was not deducting PAYE. If she was, the Appellant would have known because she would have been given the appropriate paperwork. It follows from those two points taken together that the Judge was entitled to find that the Respondent was in breach of an obligation to pay PAYE.

10. That establishes the necessary first step for a finding of illegal performance, but it is not by itself conclusive. As was confirmed in Enfield, a failure by an employer to pay tax under PAYE on an employee's earnings does not necessarily constitute unlawful performance of a contract of employment. It will do so if, but only if, there is bad faith involved. The Judge evidently believed that that was the case. Again, he does not say so in terms but such a finding is necessarily implicit in the finding of ‘collusion’ in paragraph 9 of the Reasons. The Appellant submits that he was not entitled to make such a finding. This was not a case where there was evidence that any misrepresentation had been made by the Respondent to the Revenue. In that connection it was significant that the Judge had heard no evidence from the Respondent. At most it was a case, so far as the evidence went, of a failure to declare.

11. I do not accept that the absence of a (proved) misrepresentation renders impossible a finding of bad faith on the Respondent's part. On the contrary, a deliberate failure by an employer to declare to HMRC that he has an employee in respect of whom he is obliged to pay PAYE is in my view plainly bad faith. It is clear from the judgment of Elias J in this Tribunal in Enfield, expressly endorsed by the Court of Appeal, that concealment just as much as misrepresentation can constitute bad faith in this context.

12. However, the question is whether there was evidence on the basis of which the Judge could properly find that that is what happened in this case. I am tempted to say that there was. It is hard to think that the Respondent was in any real doubt as to her obligation to pay PAYE in respect of the Appellant. The situation is very different from that in the two cases considered in Enfield, where the position of the putative employee was genuinely in a grey area between employment and self-employment. ...

13. However, even if I were wrong about that, there is a further difficulty when we come to what I have described as element (b). Even if the Respondent's performance of the contract was illegal, the question remains whether the Appellant participated in that illegality. The Judge's findings on this aspect are clearly unsatisfactory. The authorities establish that mere passive acquiescence in a misrepresentation - or, I would add, and perhaps a fortiori, concealment - by his or her employer is not enough: there needs to be an element of positive participation [tribunal’s emphasis]. But the Reasons contain no examination of the Appellant's knowledge or state of mind about the arrangement under which she was paid cash-in-hand. Did she, for example, positively seek such an arrangement herself or was it simply presented to her by the Respondent as a fait accompli? It is true that the finding of ‘collusion’, in paragraph 9 of the Reasons, ought to imply a finding by the Judge that the Appellant had indeed actively associated herself in the Respondent's conduct; but there is no indication of what that active participation consisted of and, importantly, such a finding would be inconsistent with the Judge's express acknowledgement, at paragraph 8(b) of the Reasons, that the Appellant's state of mind might simply have been that she was ‘not bothered’ whether the Respondent was paying tax or not. That may - I do not have the material to know - have been a generous finding, but once it is acknowledged as a possibility it seems to me wholly inconsistent with a finding of participation.

... .”

3.3 It is clear from the above legal authorities that, although the Courts used to justify rejecting a claim on grounds of illegality on the basis that ‘the dirty dog gets no dinner here’ (see Tomlinson v Dick Evans U Drive Ltd [1978] ICR 639), this approach, following Enfield and Hall, is not as clear cut as may previously have been thought. In particular, in Hall, the Court of Appeal provided a definitive three category classification of cases where a contract may be tainted with illegality. On the facts of the present case, the tribunal was only concerned with the third category of cases identified in Hall, namely a contract which was perfectly lawful when made, but was illegally performed by one party in circumstances where the other party knowingly participated in that illegal performance. In Hall, the Court approved statement of principles set out in Ashmore, Benson Ltd v Dawson Ltd [1973] 1 WLR 828, when Lord Denning MR stated:-

“Not only did [the plaintiff’s transport manager] know of the illegality. He participated [tribunal’s emphasis] in it by sanctioning the loading of the vehicle with the load in excess of the Regulations. The participation [tribunal’s emphasis] in the illegal performance of the contract debars the [the plaintiff] from suing [the defendant] on it or suing [the defendant] for negligence.”

The dicta of Scarman LJ is to similar effect:-

“But knowledge by itself is not enough. There must be knowledge of participation ... for those reasons I think the performance was illegal.”

It is of interest that the case of Hall was a case of sex discrimination not of unfair dismissal. However, Gibson LJ concluded, after reviewing the case law, at Paragraph 38 of his judgment:-

“In cases where the contract of employment is neither entered into for an illegal purpose nor prohibited by statute, the illegal performance of the contract will not render the contract unenforceable unless, in addition to knowledge of the facts which makes the performance illegal the employee actively participates in the illegal performance. It is a question of fact in each case whether there has been a sufficient degree of participation by the employee.”

(See further Mance LJ at Paragraphs 71 and 80A.)

3.4 Therefore, in a case falling within that third Hall category, in order for the doctrine to act as a defence to a claim, there must be a illegal performance of the contract by one party of the contract and knowledge of that illegal performance and participation in by the other party to the contract. In an employment context, the position usually arises out of an employee’s knowledge and participation in the illegal performance of the contract of employment by the employer. ‘Knowledge’ in this context requires the employee to have knowledge of the facts which renders the performance illegal as opposed to knowledge that the performance is contrary to law - ignorance of the law is no defence (see further Enfield). As emphasised and confirmed in Enfield and Pickard, participation requires some active participation and knowledge without participation will not suffice. Thus the present position would seem to be that where the underlying contract of employment is illegally performed and the employee has the requisite knowledge and participation, the claim for unfair dismissal and/or breach of contract cannot proceed by operation of public policy (see further Tomlinson).

3.5 The illegality or otherwise of a contract does not, however, affect the tribunal’s jurisdiction to hear a case, but only concerns the parties’ right to enforce the contract (see further Wilkinson v Lugg [1990] ICR 599).

3.6 In a case involving illegality, the issue arises whether the objectionable part of an agreement can be severed, using a ‘blue pencil approach’, so that the remainder of the contract can be enforced. The argument that severance should be allowed has been rejected in a series of cases on the ground the contract of employment has to be regarded as one entire contract and the illegality is such as to infect the whole of the arrangement and make it enforceable (see further Miller v Karlinski [1945] 62 TLR 85 and Corby v Morrison [1980] ICR 564). Similarly, in the case of Attridge v Jaydees Newsagents Ltd [1980] UKEAT/603/79), the Employment Appeal Tribunal rejected an argument that, because the employee was less blameworthy than the employer, he should be allowed to enforce the contract to a limited extent.

4.1 In light of the findings of fact made by me and the relevant case law referred to in the previous paragraphs of this decision, I reached the following conclusions, as set out in the following sub-paragraphs of this decision.

4.2 As is apparent from the issues, the subject-matter of this pre-hearing review, the tribunal has to determine whether the claimant’s contract of employment was tainted with illegality and therefore whether he is able to enforce the said contract of employment for the purposes of his claim for unfair dismissal and/or breach of contract. If he is not able to enforce the said contract of employment, his said claims of unfair dismissal and/or breach of contract must fail and therefore must be dismissed. It is an issue of enforceability and is not an issue whether the tribunal has jurisdiction to hear the said claims (see Wilkinson).

4.3 The claimant at all times was an employee of the respondent under a contract of employment. In the claim form, the claimant has not disputed he was paid by the respondent £125.00 into his bank account and £170.00 ‘cash in hand’ and further that he was not paid ‘properly’ by the respondent. I am satisfied the claimant, by his said admissions, in the claim form, as referred to above, was fully aware of the illegality of the arrangement he entered into with the respondent when he was paid the said sum of £170.00 ‘cash in hand’ and the sum of £125.00 into his bank account. Further, he therefore would have known that the pay-slip given to him, saying he was paid £141.00 per week was not accurate. He also knew the P60 certificates sent to HMRC did not accurately record his earnings. He was fully aware, in the circumstances, the respondent had not made all relevant deductions of tax and national insurance, as required under the PAYE system and there was therefore illegal performance of the contract. The respondent, in his evidence, did not seek to dispute the illegality of the performance of the contract. He accepted the pay-slips and P60 certificates were inaccurate and did not reflect the claimant’s true earnings and he was therefore misrepresenting the true position to HMRC in the said certificates. In light of the foregoing, I am satisfied by his actions there was the necessary element of bad faith on the part of the respondent.

4.4 The claimant at all times knew of the illegality of the arrangement entered into with the respondent, whereby he was paid £170.00 ‘cash in hand’ and which he knew was not being properly put through ‘the books’ of the respondent, with all relevant deductions for tax and national insurance properly deducted and recorded under the PAYE system. Further, on the evidence, as set out previously, I am satisfied this arrangement was entered into by the respondent at the request of the claimant, due to the claimant’s financial problems. On the evidence before me, I do not accept the claimant ever sought to end the arrangement. It has continued from in or about 2009 and has clearly been of considerable financial benefit to the claimant.

In the circumstances, I am therefore satisfied there has been the necessary knowledge but also ‘active participation’ (see further Hale and Pickard) by the claimant in the said illegality.

4.5 In the circumstances, I am satisfied the claimant’s contract of employment has been tainted by illegality. Further, in light of the authorities in the case of Miller and Attridge, referred to previously, it is not possible to sever the ‘objectionable/illegal part of the contract’.

4.6 Therefore the claimant’s contract of employment, having been tainted with illegality, is unenforceable. The claimant’s claims of unfair dismissal and/or breach of contract must therefore be dismissed.

Employment Judge

Date and place of hearing: 15 April 2014, Belfast

Date decision recorded in register and issued to parties: