United Kingdom Employment Appeal Tribunal

APPEARANCES

 

For the Appellant	ANDREW WILLIAMS (Representative) Andrew Williams Consultancy 44 Waller Road New Cross London SE14 4LD
For the Respondent	NO APPEARANCE OR REPRESENTATION BY OR ON BEHALF OF THE RESPONDENT


 


JUDGE ALTMAN

1. This is an appeal from the decision of the Employment Tribunal sitting at Stratford on 10 September 1999. The Employment Tribunal declined jurisdiction to deal with the complaint of the Appellant that he was unfairly dismissed on the ground that they had no jurisdiction to do so. The reason for their decision was that the Appellant agreed to a contract which was "tainted by illegality."
2. The Respondents have not appeared today and attempts to contact them by telephone were unsuccessful but it is clear that Notice of Hearing was sent out in due form. Accordingly we have proceeded to consider the appeal.
3. The way in which this matter came to be considered by the Employment Tribunal is of some relevance. Originally, on 18 May 1999, the claim for unfair dismissal came before the Employment Tribunal and was dismissed on the grounds that there was no dismissal, but the Appellant did not attend. Accordingly he sought a review and the application for a review was dealt with by the Employment Tribunal on the same day as they went on to dismiss the application.
4. The matter was listed for application for review. The application was granted and then immediately after the Tribunal proceeded to deal with the main case. Furthermore, it was whilst the evidence was being developed that the Employment Tribunal quite properly took of their own motion the issue as to whether the contract of employment, about which evidence was being given, was or was not a legal contract. The factual basis for that concern came from the evidence, which seemed to indicate that the Appellant was receiving his pay without the Respondents' accounting to the Inland Revenue for tax or National Insurance.
5. The Tribunal heard evidence from the Appellant and the Respondent and sought payslips from the Appellant, but Mr Williams who appears for the Appellant today tells us that he sought an adjournment so that the Respondents could produce their payments book, there being an issue as to what was there recorded and the extent to which the Respondents could rely on the third party to have been responsible.
6. The way in which the matter was developed by the Tribunal is as follows. In paragraph 2 they said:

"..…it came to the attention of the Tribunal that this was a case where the question of the illegality of the contract might arise, as it seemed that sums of money had been paid to the (Appellant) which might not have had the proper amounts of tax and national insurance deducted."

7. The Employment Tribunal then set out the facts upon which they based their decision and in paragraph 5 they set out the evidence of the Appellant, which, in due course they accepted and it is proper to quote that in full:

"The (Appellant) sometimes received payslips but they showed a different amount to the amount he actually received in cash. There was a serious dispute on the evidence as to how the (Appellant) was paid. The (Appellant's) evidence was that he received a payslip which indicated a sum of around £75 being paid to him when in fact he received £180 in cash. He says that he was told that he was being paid £200 but that £20 had been deducted for tax and national insurance purposes."

Pausing there, it is quite clear that the contract there being described by the Appellant was of his being duly paid the money owed and understanding that there was some deduction of tax and national insurance and as we know nothing about the extent to which he was employed or unemployed in the period before then, or what allowances there were, we have no reason to consider that the amount in itself was noticeably low. However, the Appellant also gave evidence of a different amount being on the payslip.

8. The Employment Tribunal then went on:

"The (Appellant) acknowledged that a lower sum was being paid to the tax and National Insurance authorities than ought to have been paid. The (Appellant) felt particularly aggrieved because he did not believe that the £20 which was being deducted was being forwarded to the appropriate authorities."

We are told that it is, and was, the Appellant's case that when he sought to recover benefit following the termination of his employment he discovered that national insurance payments had not been made by his employer, the Respondent.

9. Where the Employment Tribunal refer to the word 'acknowledged', we assume this was related to the evidence that the Employment Tribunal were recording at the time they heard the case, and it was common ground that by then the Appellant knew that a lower sum was being paid to the tax and national insurance authorities than ought to have been paid. That does not appear to us to be a finding that supports or contradicts the proposition that at the time he was being paid he knew what was going on.
10. In the following sentence the Tribunal say that:

"The (Appellant) felt particularly aggrieved because he did not believe that the £20 was being forwarded to the appropriate authorities"

There again it is not clear on the face of the decision whether that sense of grievance arose, as we are told the Appellant says it did, when he sought benefit after the employment ended, or whether it was evidence of knowledge of what was going on at the time.

11. The Employment Tribunal then, in paragraph 7, went on to deal with the law and in paragraph 8 they summarised, in a couple of sentences, the legal provisions. They said this:

"It is settled law that an illegal contract is not enforceable and an Employment Tribunal has no jurisdiction to hear claims concerning statutory employment rights arising out of such a contract."

That as a general statement is of course unexceptionable. But the issue relating to the position of the Appellant was then set out in the following sentence:

"Where an employee genuinely has no knowledge of the alleged illegality, he or she might be able to continue to rely on the contract."

12. We have been helpfully referred to a number of decided cases which deal with this very vexed question. The extent to which an employee is to be fixed with the illegality of a contract, so as to be disentitled from bringing any claim upon it, is a matter that has been considered many times by the courts, and that has been helpfully reviewed in a number of cases before the Employment Tribunal.
13. In his skeleton argument Mr Williams helpfully referred to a number of the important cases. He referred to Annandale Engineering v Samson [1994] IRLR 59, Newlands v Simons & Willer (Hairdressers) Ltd [1981] ICR 521 and Hewcastle Catering Ltd v Ahmed & Elkamah [1992] ICR 626.
14. The last case was a decision of the Court of Appeal. The headnote to that case states:

"…unless a contract was entered into for the purpose of doing an illegal act or it was prohibited by law, public policy did not necessarily require that a contract tainted with illegality in its performance was unenforceable; that since it was the company that was obliged to make the value added tax returns and the Applicants had neither benefited nor were essential parties to the fraud, it would be contrary to public policy that the Applicant should be deprived of compensation for being unfairly dismissed when it was the company that had involved them in the fraud and then dismissed them because they had assisted in the investigation by the Customs and Excise into the offences committed by the company's managers."

That of course was a different matter to the case we have to decide, in that the employees there had in fact lost their jobs for acting in support of public policy in bringing to light the illegality of the contract, but the fact that not all these cases are simple and clear-cut is illustrated by that decision.

15. In the Newland case the matter is put in this way at page 528 (A), Mr Justice May:

"In the view of the majority of this appeal Tribunal, the question of whether the employee is in her turn in such circumstances also affected by the illegal performance of the contract by the employers depends upon whether she was a party to or knew of her employers' illegality."

We would only add that the issue of knowledge is really relied on, so it seems to us in the cases, because it gives rise to the inference that the employee is actually party to what was going on and either agreed to what was happening or turned a blind eye to it, even if in order to preserve her job, and that that is so contrary to public policy that it gives rise to an illegal contract upon which the employee cannot rely.

16. We could also refer ourselves to the case of Euro Diam Ltd [1990] 1 QB1 where there is reference to the need, in some instances, to balance reprehensible conduct as between employer and employee. We also refer to the analysis of the law in Harvey in Section A (77), and following, to underline that this area is not wholly free from difficulty and does depend upon a Tribunal analysing, with some care, the extent and nature of any knowledge, on the part of an employee, of the transactions that are subject to question.
17. Knowledge of the ingredients may not necessarily give rise to knowledge that the Inland Revenue are being deprived or misled, particularly in those cases where the employee is receiving no more than that to which he or she is entitled. It seems to us that in setting out the principles of law the Employment Tribunal appear to have attributed to the employee the burden of establishing lack of knowledge where they say:

8. "Where an employee genuinely has no knowledge of the alleged illegality, he or she might be able to continue to rely on the contract."

18. It seems to us that, without wishing to pick over in too minute detail the wording of a decision of the Employment Tribunal, the emphasis there disclosed leads us to be concerned that in applying the facts the Employment Tribunal may have been asking themselves the wrong question. It is not for the employee to show that he had no knowledge of the alleged illegality.
19. The issue for the Tribunal, if the matter is raised of their own motion, is to consider whether they are satisfied that the employee did know of the illegality. We are encouraged in that conclusion because there is a qualified right established, even then, to continue to rely on the contract; "he or she might" be able to continue to rely on the contract. It is clear that if the employee does not know of the illegality then the employee is entitled to rely on the contract. There is no qualification to it at all.
20. Accordingly, it does seem to us that, on the face of the decision, the Employment Tribunal do appear to have erred in setting out the question of law to which to apply their findings of fact. We have gone on then to consider the final findings of fact as related to that question in the conclusions of the Tribunal.
21. Having established that they preferred the evidence of the Appellant to the Respondent the Tribunal conclude with these words:

9. "Given that the (Appellant) accepted that that was a lower amount being paid to the tax and National Insurance bodies than was proper, the Tribunal feel that they have no alternative but to decide that this was an illegal contract. Although the (Appellant) clearly objected to this arrangement, it was clear that he did participate in it and therefore he has some culpability."

22. They go on to say in paragraph 10:

"…it is clear that he did agree to a contract which was tainted by illegality…"

Again, it is not so much as to whether an employee agrees to a contract, as to whether he agrees to and knows about the illegality of that contract and it does appear, on the face of the conclusions, that the Employment Tribunal were concluding that the fact of the improper amount being paid was sufficient to disentitle the Applicant. They say that he participated in it, although he objected to it.

23. We feel it is important to base our judgement on the way in which the decision of the Tribunal appears on its face. The position is not free from doubt and it may well be that there was evidence before the Tribunal from which they were entitled to come to conclusions which would have fulfilled the statutory test.
24. On the other hand, the substantive claim of the Appellant was dismissed on a preliminary hearing and if a party is to be disentitled from being able to pursue the normal statutory rights to have his claim for unfair dismissal heard, on an important issue of legality, it does seem to us that it is essential that the decision of the Tribunal can be seen clearly in the face of the established legal principles.
25. This is the more so because not only does a finding of this kind disentitle a party to pursue a claim for unfair dismissal but it also carries with it a stigma and a serious criticism as to the integrity of a party which, Mr Williams has told us, is a matter about which this Appellant has been concerned.
26. We recognise that the Chairman, together with the lay representatives, were faced with the difficult task, as having to take an issue themselves and to pursue it themselves, and elicit the evidence and make the findings themselves, in a difficult situation which had just been thrust upon them. Nonetheless, in the end in the way in which the decision was expressed and for the reasons that we have set out, we find that on the face of the decision the Employment Tribunal erred in not identifying the correct legal test and in making findings of fact and conclusions which did not on the face of the decision satisfy the legal questions they had to answer.
27. For those reasons, therefore, we have resolved to allow this appeal and we order that it be remitted to another Employment Tribunal, freshly constituted, to consider this issue. We are mindful, finally, of the fact that not only did the Tribunal itself have to cope with the issue of illegality on the spur of the moment, so on the face of it did the parties themselves; although the Tribunal very helpfully and properly gave them some time to consider their position before proceeding.
28. It may be thought helpful by the Tribunal that has to deal with this matter to consider the desirability of a directions hearing before the main hearing takes place so that everyone understands the issues of knowledge, that has to be addressed, and so that any issues for disclosure can be made. We know that the Appellant, through his representative Mr Williams, is mindful of a number of documents and books of account, which he would ask for and argue as relevant. We have no views about the merits of that and at the end of the day it is a matter for the Tribunal to decide whether there should be a directions hearing but we simply mention it as a matter which occurred to us and which may be of assistance to those involved.