United Kingdom Employment Appeal Tribunal

APPEARANCES

 

For the Appellant	MR SEAN JAMES (of Counsel) Instructed by: Edwin Coe 2 Stone Buildings Lincoln's Inn London WC2A 3TH
For the Respondents	THE RESPONDENTS DEBARRED FROM PROCEEDINGS.

SUMMARY

Unfair Dismissal

The Applicants were properly found to be employees. Their participation in illegal performance if any by the Respondents (failure to deduct tax and National Insurance) was not such as to prevent them from seeking to enforce the contracts.


 


HIS HONOUR JUDGE D SEROTA QC

1. This is an appeal from a decision of the Employment Tribunal at London (Central) chaired by Mr S Bedeau promulgated on 20 April 2004 after a six day hearing which spanned a period of some eight months. There was further one day spent in Chambers. The Employment Tribunal held that the Applicants were employed by the Respondent, the contracts of employment were not illegal and therefore the Employment Tribunal had jurisdiction to entertain the matter.
2. The appeal challenges firstly, whether the Applicants were properly described as employees and secondly, the finding that the contract was not illegal. Beatson J referred this matter to a full hearing on 14 June 2004. We note that the Applicants (the Respondents to the appeal) failed to file answers to the Notice of Appeal or deal with correspondence from the Employment Appeal Tribunal and consequent upon an order made by the Registrar on 11 August, they were debarred from defending on 26 August. Therefore, this appeal has proceeded undefended. It is somewhat unusual that the Applicants who should have fought a case such as this, which lasted, as we have said for same six days and over an eight month period, and who were represented by solicitors and Counsel should have somehow dropped out of sight. Be that as it may, this matter today proceeds undefended.
3. The factual background we can set out quite briefly. The Respondent is a company incorporated, I believe in the United States. It certainly has an American base and it produces something known as dynamic cash acceleration appliance. I assume by the somewhat blank look on Mr Jones' (Counsel for the Respondent) face that he is just as ignorant as I am as to what a dynamic cash accelerator appliance is. The company also develops software. The Applicants were involved in the computer industry and in the autumn of 2001 were in touch with the Respondent with a view to establishing a United Kingdom office for the Respondent. They were to have an initial two month period as a trial, which was extended to four months, and they began work in 2001. They were paid from the United States together with their expenses, and worked from home.
4. The Employment Tribunal has set out in considerable detail the factual background which we need not repeat but we note that on 2 November a Director of the Respondent, Mr Matzke (he is described as Global Vice President for Sales and Marketing) sent an e-mail to the Applicants in which a two-phase relationship structure was proposed. Phase 1 would start on 5 November 2001 and run for 60 days. If phase I was successful the Respondent would set up the Applicants as Warp's UK based Channel Managers responsible for managing a UK sales channel.

"Phase 1

Warp will provide each of you a $3,000 per month draw (6,000US each over a two month period) to be paid in two monthly instalments. Payments will be made on November 15^th and December 15^th, 2001. We will also pay you an 8% commission of the net sales (amount the customer pays Warp) to be split between the both of you. We will subtract the draw from this amount in calculating the net commission, Warp will also reimburse each of your for reasonable and appropriate expenses, including travel expense, phone expense, fixed DSL expense and other expenses directly relating to selling Warp products. At this point we don't feel it appropriate to provide laptops or direct access to the Warp network. In this phase you will be considered referral partners, but we will pay you a draw and cover reasonable expenses.

You agreed to accomplish the following:

1 Obtain six LOI's from six end users based in doing business in the UK.

2 Close three deals (purchase orders and contracts signed) resulting from the signed LOI's.

3 Initiate meeting between Warp and leading UK based systems in integrators.

4 Report pipeline activity and expense reports on a weekly basis.

5 Warp will agree to:

1 Provide appropriate sales and implementation resources required to service and support sales engagements and implementations of initial trial customers.

If we are successful in achieving the goals outlined above then we are prepared to formally set up a UK channel with the two of you acting as local Channel Sales Managers. As such we will set up as employees of Warps Solutions. We will also commit at a minimum the revenue achieved in the first UK sale to our UK effort and I will work with you on a UK specific channel sales plan and target matrix."

5. Discussions continued between the parties and on 9 November Mr Matzke sent a further e-mail which was entitled "Letter of Understanding". It repeated, we are told, much of the earlier e-mail of 2^nd November; in addition the Applicants were to report on a weekly basis and to provide pre-valuation documentation on potential customers. Mr Matzke stated the company would need prior to entering into the agreement, pre-valuation surveys for Demon Internet and Verio, as well as signed NDAs (Non-Disclosure Agreements) for both Applicants. The final paragraph stated:

"Each of you must also indemnify Warp from any actions that may be brought against the company by Connectology, Epic Realm related to your relationship with Warp. Additionally, you must also expressly indicate that you have no employment agreements or confidentiality agreements with either Connectology, Epic Realm or any other company that in any way can prevent you from working with Warp."

This Letter of Understanding was signed by the Applicants. There was no reference in it to set hours of work, holiday entitlement, sick pay arrangements, termination provisions, nor with regard to invoicing of expenses. They initially worked from home and the Respondent paid for the setting up costs in running the business, which as I have said, was initially from Mr Vermani's home. After he had sold his home, it was rented for three months, and they moved to offices in Berkeley Street and later in Farringdon. The Respondent paid the ongoing running costs in respect of telephones, fax machines and internet access. The letter of 9 November also increased the initial period from 2 months to 4 months. Between November and April the Applicants, therefore, were carrying out these services for the Respondent, and were being paid directly from the United States.

6. The Employment Tribunal found that the Applicant made repeated requests for written particulars of employment and that these were not provided. On 22 April Mr Matzke forwarded to the Applicants what was described as the 2002 Consulting Plan. Mr Vermani was described as Managing Director, UK and Europe and Mr Nunoo was Business Development Director, UK and Europe. Their employment status was described as "consultant". Their reporting line was to Mr Matzke. Mr Vermani's responsibilities were "To manage re-seller relationships and drive revenue through the channel including managing account executives linked to specific re-seller accounts and assisting them achieve their revenue goals. Provide assistance to Geoff enclosing new re-seller relationships." Mr Nunoo's responsibilities were: "Prospect and engage in the sales process potential re-sellers and end customers. Work with Rahim enclosing re-sellers and end customers." The Applicants were to be paid $6,875 each per month together with bonus payments for their performance and achievement of targets. Expense claims were submitted supported by receipts and were paid.
7. The Employment Tribunal found that the Respondent's senior management told the Applicants that it was proposing to incorporate a UK company which would account for their income tax, National Insurance and VAT. Around March 2002 the Applicants became concerned the UK Company had not been incorporated and made further enquiries about their tax position. They both sought tax advice. Mr Vermani was advised he should form a limited liability company into which monies from the Respondent should be paid. On 16 April his company RHV Technology Ltd was incorporated. From November and December payments were paid into that the company's account; prior to then they had been paid into his Abbey National personal account. Mr Nunoo also sought advice from a tax accountant, who gave him similar advice to the advice given to Mr Vermani. Mr Nunoo incorporated his company known as Genec Technology Ltd on 12 April. The September to December payments were paid to the company.
8. The Employment Tribunal at paragraphs 6.8 and 6.19 did look at certain documentation provided by Mr Vermani and considered Mr Nunoo's evidence as well. It is apparent that the Employment Tribunal may have misunderstood the evidence relating to Mr Vermani, because it is quite clear that for the tax year 2001 - 2002 (and we are now referring to the documentation which we have in our bundle from pages 67 to 75) he received an income, for he is shown as having received an income of just over £32,000 from the tax year of which tax had been deducted at source under PAYE in the sum of £7,928.80. That, as it seems to us, excludes, and is bound to exclude, any payments made by the Respondent as it is common ground that those payments were made gross. It also could not include payments made by the service company which had not been incorporated at the time of this return.
9. We should note that in paragraph 6.26 of its decision the Employment Tribunal referred to evidence given by Mr Malcolm Coster who was the Chief Executive Officer, President and Chairman of the Respondent Company having become so in 1 August 2003. His involvement with the Respondent began in April 2002 when he became a shareholder holding 8% of the shares and he acted between April and August 2002 as an adviser. He met Mr Vermani and Mr Nunoo, although not formally, and was concerned about the payments made to them. He expected they would have been paid less deductions of income tax and National Insurance and pushed for the establishment of a UK based company to set up a pay roll system and regularise payments, not only in respect of the Applicants, but in respect of others who were carrying work for the Respondent.
10. A company known as Warp Solutions Ltd was incorporated on 13 September 2002. It seems, therefore, reasonable that the Applicants should have assumed that their National Insurance and tax responsibilities would be taken over by this company. However, the company did not start to trade until March or April 2003. Prior to that, however, the Respondent had on 23 December 2002 terminated its contracts with the Applicants. The Applicants maintained that they had been unfairly dismissed. The Respondent asserted firstly, that they were not employees and therefore could not have been unfairly dismissed and later by amendment that if contrary to its primary case the Applicants were employees, the contracts of employment were void for illegality. It was argued that they had been paid gross without any deductions of tax or National Insurance and were sufficiently involved in the illegal performance of their contracts of employment as to render them unenforceable at their suit.
11. The Employment Tribunal in paragraphs 10 to 50 gives an interesting and full disquisition on the law as to whether a person is an employee or can be regarded as a self employed contractor. We were told by Mr Jones that a number of the authorities there referred to, had not been referred to by the Advocates at the Tribunal. However, Mr Jones told us that he has no quarrel with the way in which the Employment Tribunal set out the law. He considered it was correct. His concern, however, was as to the application of the law. At paragraphs 51 to 59 the Employment Tribunal set out their conclusions. It also went through the multiple test (as it calls it) which perhaps comes from the often cited decision of McKenna J in Ready Mixed Concrete Ltd v Minister of Pensions and National Insurance [1968] 2 QB 497.
12. In paragraphs 51 to 59 it went through a number of relevant factors. It noted firstly the issue of control. The Employment Tribunal noted that the Applicants were experienced in computer technology and were required to market the Respondent's software and hardware. They reported daily to Mr Maztke or to Mr Douglas. They were required to submit regular accounts of their current and future work. The Employment Tribunal saw a number of these documents. As a result of the Applicants' experience of the industry, the Employment Tribunal found, that they were not told how to carry out their work. They operated at a time during the day when they could liaise with the Respondent having regard to the time difference between the UK and the USA. Where contracts could be secured with a particular client, conclusion of the contract would require the approval of the Respondent. The Employment Tribunal accepted that there was some control of their work consistent with the fact that they were experienced professional workers using their skill and judgment. Mr Jones on behalf of the Respondent takes issue with findings which we shall come to shortly, in relation to control. He does not challenge the findings of the Employment Tribunal in relation to mutuality of obligation set out at paragraph 53, financial risks in paragraph 54, and personal performance, skill and judgment in paragraph 55.
13. It is noted that the Applicants used the Respondent's business cards with their names and job titles, and that they had not entered into the contract with the Respondent through their service companies as separate legal entities with whom the Respondent was required to trade. The Employment Tribunal at paragraph 56 went on to consider payment of income tax, National Insurance and VAT and came to the conclusion that as income tax, and National Insurance were not paid nor deducted, this was inconsistent with there being a contract of employment. At paragraph 57 the Employment Tribunal said:

"We have not been told whether the Applicants were registered for VAT. There was no evidence suggestive that they were. The absence of registration for VAT. is consistent with there being an employment relationship.

This finding is criticised. We deal with this matter quite shortly. It seems to us that had there had been evidence that these Applicants were registered for VAT, it was a matter that was bound to come out during the course of a 6 day hearing, in which both sides were represented by Counsel and solicitors, who were well aware of the significance of registration for VAT. It seems to us that the Employment Tribunal was perfectly entitled to infer, as it appears quite clearly to have done, that neither of the Applicants were registered for VAT.

14. The Employment Tribunal went on to consider whether there were other terms consistent with there being a contract of service, such as sickness pay, holiday pay, pension, greviance and disciplinary procedures. The Employment Tribunal came to the conclusion that the absence of any specific arrangements militated against there being a contract of service. The Employment Tribunal then went on to say this:

"59 From our conclusions we are required to balance the various factors considered above. Control; mutuality of obligation; financial risk; personal performance; the absence of registration for VAT and the provision of tools and equipment, are all supportive of there being a contract of service. The other factors, on the other side of the scale, such as: the payment of tax and National Insurance; the absence of sickness pay provisions; pension grievance and disciplinary procedures and notice did not outweigh those supportive of there being a contract of employment. The intention of the parties would be applicable if the position either way was evenly balanced. Accordingly, our unanimous decision is that the Applicants worked under a contract of service and were employed by the Respondent."

That conclusion is attacked by the Respondent. First, on the basis that there was misapprehension as to the position of the VAT; we have dealt with that. Second, because the Employment Tribunal has in fact treated control as being a factor supporting the existence of a contract of service as opposed to there being a contract of services.

15. We have read very carefully what Mr Jones has said, in his Skeleton Argument and of course have also carefully considered what he said in his submissions, but it seems to us that the Employment Tribunal quite clearly applied the correct test. They had all the facts before them, and it seems to us somewhat difficult to see what conclusion they could have come to otherwise in relation to the question of control. In any event, the conclusion to which they came in this was well within their remit. These were senior or relatively senior staff, but the only persons, so as to speak, "employed" by the company. Their job description and the way in which they had to report, all in our view, clearly point to the fact that the Employment Tribunal was correct in coming to its conclusions, not only in relation to control, but also in relation to as whether or not there was a contract of employment. The appeal on this ground therefore must be dismissed.
16. We now turn to consider the next part of the appeal which relates to the issue of illegality. The Employment Tribunal say this in paragraph 65:

"The Applicants contended that they were concerned right from the early days and months of the employment with the Respondent about the Respondent accounting for tax and National Insurance. They wanted the Respondent to clarify the position and to move to set up the company in the United Kingdom through which tax and National Insurance could be paid before payments to them. As there was no movement on the part of the Respondent, they sought tax advice and were told that in order to distance themselves from the consequences of payments of monies without deductions of tax and National Insurance, a separate company should be established."

The Employment Tribunal then note that Mr Coster was pushing for the establishment of a UK company to regularise payments to others including, the Applicants, as also did Mr Huggett. The Employment Tribunal considered the decision of the Court of Appeal in Hall v Woolston Hall Leisure Ltd [2000] IRLR 579 which Peer Gibson LJ summarised the law in this way.

"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 make the performance illegal, the employee actively participates in the illegal performance. It is a question of fact in each case whether there has been sufficient degree of participation by the employee."

17. The Employment Tribunal came to the conclusion that:

"the contracts were not tainted with illegality. Both Applicants were of the view that the payments from the Respondents ought to have been made net of tax and National Insurance but were not. They wanted to avoid any consequence for them in the UK as far as they were concerned of the Respondent not paying tax and National Insurance. Advice was given top them to set up a separate company from which it could be seen the payments were being made as opposed to payments to their own personal accounts. They had hoped that at some future date, once the UK company was established, that it would be determined precisely whether they would have to pay tax and National Insurance on the payments received or that such deductions were already made. Both Mr Coster and Mr Huggett were anxious that a UK base company should be set out to clarify the position. In Mr Huggett's case he too sought professional advice regarding the payments that he received. The position was not resolved until the spring of 2003 when the UK company was trading. Had the Applicant's employment continued up to that point, the position would have been clarified and if they were required to make the payments to Inland Revenue, we are satisfied, that that would have been done. In Mr Vermani's case he did declare his income from the Respondent and from Connectology. Mr Nunoo had not corresponded with the Inland Revenue."

18. We think the Employment Tribunal may be wrong in so far as the evidence is concerned in relation to the Respondent. Mr Jones attacks this part of the decision. What Mr Jones says is: "it is perfectly clear that these Applicants had sufficient participation in the way moneys were paid gross so as to make the contracts unenforceable at their suit by reason of illegality". He points in particular at the fact that they believed that National Insurance and PAYE should have been deducted but were not. He points to the finding that they both set up service copies to distance themselves from the payments, so the monies would not be paid directly into their bank accounts. He then submits that in the circumstances, that is more than sufficient to show that the Employment Tribunal was wrong and these Applicants actively participated in the illegal performance.
19. We are not able to accept that submission; in particular we point to the fact that they had been led to believe that the position was about to be regularised by the incorporation of the English company. The English company was in fact incorporated in September, but nothing was done between September and December to regularise the position. Indeed it was not done until the following spring. The facts, in our opinion justified the Employment Tribunal in the conclusion to which it came that the contracts were not tainted with illegality and that the participation of these Applicants was not such as to render any illegal performance by the Respondent such as to prevent them bringing proceedings as they did for unfair dismissal.
20. In the circumstances therefore, and despite the courteous and persuasive efforts of Mr Jones, this appeal must be dismissed.