United Kingdom Employment Appeal Tribunal

APPEARANCES

 

For the Appellant	MR DANIEL TATTON-BROWN (of Counsel) Instructed by: Messrs Merriman White Solicitors 3 King's Bench Walk Inner Temple London EC4Y 7DJ
For the Respondent	MR DIJEN BASU (of Counsel) Instructed by: Messrs Edwards Geldard Solicitors 44 The Ropewalk Nottingham NG1 5EL

SUMMARY

Contract of Employment

Illegality. Application of Hall v Woolston Hall Leisure Ltd including dicta of Mance LJ concerning relevance of employee's completion of tax return.


 


THE HONOURABLE MR JUSTICE RIMER

1. This is an appeal by Mr Christian Kaid against the decision of an employment tribunal sitting at London (Central) over three days in March and May 2003 and chaired by Mr G.P. Sigsworth. The tribunal sent their extended reasons to the parties on 22 May 2003. Mr Kaid was the applicant. The respondent was his former employer, Gruppo Limited ("Gruppo"). Mr Daniel Tatton-Brown appeared for Mr Kaid both before the tribunal and us. Mr Dijen Basu appeared for Gruppo both before the tribunal and us.
2. Mr Kaid's claim was for compensation for unfair dismissal and other monetary sums. But for the point which is the subject of this appeal, the tribunal would have found that he was unfairly constructively dismissed and entitled to compensation; and that he was also entitled to six days' holiday pay and 17 days salary. However, the tribunal also found that his employment contract was performed illegally and they held that, in consequence, public policy prevented them from affording him any remedy. The result was that they dismissed his application. By his appeal, Mr Kaid challenges that conclusion and asserts that the tribunal arrived at it in error. He asks us to remit the matter to the tribunal for a remedy hearing on the unfair dismissal claim and to order the payment of the holiday pay and unpaid salary. Gruppo resists the appeal.

The tribunal's findings of fact

3. Gruppo runs restaurants in London. Mr Kaid became an employee in the 1990s, working as a restaurant manager at The Atlantic Bar and Grill. He was later promoted to the position of group general manager, looking after both that restaurant and another one called the Isola. Gruppo's proprietors were Ms Siobhan Peyton and her brother Oliver. Mr Kaid had a close relationship with them and became almost one of their family. He reported to Mr Jean-Michel Orieux, the operations and business development director, but had a great deal of autonomy as far as the running of the two restaurants was concerned.
4. Mr Kaid was paid a basic salary and was originally also entitled to a share of the tronc. In 1997, he received a salary increase to £40,000. In 2000, Mr Orieux directed that general managers were not to receive any more payments from the tronc but were instead to be entitled to salary increases and bonuses. Mr Kaid, however, declined to take part in the general managers' bonus scheme. He said he was already well enough paid by The Atlantic, where he was at that time. By 2001, he was receiving a salary of about £70,000 a year.
5. The illegality problem arose out of an arrangement that the tribunal found Mr Kaid had with Ms Peyton and, to a lesser extent, Mr Peyton under which he could take sums of money out of the cash takings of the restaurant on an ad hoc basis. The tribunal found that, under this arrangement, he regularly withdrew sums from the petty cash in the tills, amounting to about £3,500 per annum. He would sign a petty cash receipt indicating that the money was for himself or one of the two Peytons, and would be given, typically, £200 against it. He admitted that he also took money in this way for holidays in 2000 and 2001, amounting to some £3,750 in all. His case was, and the tribunal found, that Ms Peyton knew of and approved the arrangement and that it was regarded by both of them as an alternative to a wage increase. He had asked in 1998 or 1999 for a pay rise, but Ms Peyton was not prepared to agree to it because of cash-flow difficulties caused by the opening of another restaurant. She had, however, agreed that if he ever needed cash at any time, he could obtain it by filling in a petty cash slip in either her or Mr Peyton's name and she would then deal with it at head office. Mr Kaid was not happy about the proposal, but regarded it as the only way of obtaining a pay increase.
6. The tribunal saw no documentation indicating how Gruppo treated the cash drawings. They found that the petty cash slips would go to head office and be recorded on spread sheets. They also said, in paragraph 3(v), that there was no evidence that Gruppo accounted to the Inland Revenue for the income tax or national insurance contributions due on these sums. They said this may have been because Ms Peyton allowed the arrangement to drift on too long and was not entirely in control of it, or else because after a time Mr Kaid did not tell her about the sums he withdrew. The tribunal found that "Whatever the true position was, there was a tacit understanding between them that [Mr Kaid's] salary would be boosted by sums withdrawn in this way."
7. Mr Kaid produced to the tribunal his tax returns for the years ending 5 April 2000 to 2002 inclusive. The last of them was completed for him by Gruppo's accountant. Mr Kaid's salary, taken from his P60, was shown as £70,000.18; and his tips payments, derived from a separate tronc P60, were shown as £12,820.51. No other income from Gruppo was disclosed. Mr Kaid signed the return on 20 June 2002, stating it to be correct and complete to the best of his knowledge and belief. The tribunal found he had not declared in it any of the money he had taken out of petty cash for any of these tax years.
8. The tribunal explained the circumstances in which Mr Kaid resigned after a meeting on 18 July 2002. There is no need to refer further to that. As we have said, the tribunal would, but for the illegality they found, have made a finding of unfair dismissal and directed a remedy hearing.
9. The tribunal considered the question of illegality in paragraphs 5 and 6 of their extended reasons. They said that Mr Kaid's employment contract was legal at its inception but may have become illegal in the course of its performance by reason of the agreed method of paying him additional salary with what the tribunal called "the attendant fraud on the Inland Revenue." They said that:

"The general rule is that an illegal contract is unenforceable, as being against public policy, and few, if any, statutory employment rights can be enforced under it. We were referred by the parties' representatives to a number of cases. These were Salvesen v. Simons [1994] ICR 409, EAT, Hewcastle Catering Ltd v. Ahmed [1992] ICR 626, CA, Hall v. Woolston Hall Leisure Ltd [2000] IRLR 578, CA, Coral Leisure Group Ltd v. Barnett [1981] ICR 503, EAT."

10. The tribunal then referred to the Hall case and distinguished it on two grounds. First, that it was essentially about sex discrimination and that Mrs Hall's acquiescence in the employer's illegal performance of her contract was not causally linked with her sex discrimination claim. Secondly, there was no active participation by Mrs Hall in the fraud and she had simply been the passive recipient of money paid to her in a fraudulent manner. The tribunal said that Mr Kaid's case was different, and that:

"His cause of action depends entirely on his contract of employment, and he brings his claim on the basis of an alleged breach of that contract. Second, we have to consider whether [Mr Kaid] did participate or collude in a fraud on the Inland Revenue by making a false declaration on his 2002 tax return, namely that the contents of the tax return were correct."

11. The tribunal concluded that Mr Kaid's employment contract was an illegal one. They said in paragraph 6(i):

"[Mr Kaid's] employment contract was an illegal contract. Further, on the evidence that we have seen and the findings of fact that we can make on that evidence, we conclude that both employer and employee were actively involved in denying the Inland Revenue income tax that was due to the Revenue. By suggesting the arrangement to boost [Mr Kaid's] income, and then not ensuring that the sums taken by [Mr Kaid] were properly accounted for and recorded so that income tax and could [sic] be deducted from them and paid to the Revenue, Ms Peyton set up a situation where sums due to the Revenue were not likely to be paid. By failing to declare such sums on his tax return, [Mr Kaid] boosted his income, which sums would otherwise have been reduced by 40%. Both parties gained by this arrangement. Even had [Gruppo] accounted for income tax at the standard rate to the Inland Revenue on the sums taken from the petty cash, and there is no evidence that it did so, then [Mr Kaid] should still have declared the sums received on his tax return as he should have paid tax at 40% on them. He cannot rely on the contention that he assumed that [Gruppo] would pay the Tax, as so far as receipts from the tronc were concerned, he knew that these were grossed up by [Gruppo] at only the standard rate, and that he would have to account for the difference between the standard rate and the top rate of tax, and so he entered those receipts on his tax return."

The appeal to this appeal tribunal

12. There was no dispute between counsel as to the applicable principles. It was common ground that Mr Kaid's employment contract was lawful at its inception. It was also common ground that if such a contract is performed in an illegal way, that illegality may result in the contract becoming unenforceable by either side, on the basis that it is contrary to public policy for a court or tribunal to lend any aid to its enforcement. In cases in which the public policy applies, a tribunal will, for example, refuse the employee's claim for compensation for unfair dismissal, because it is a claim based on the employment contract. This is illustrated by Salvesen v. Simons [1994] ICR 409, a decision of the Scottish EAT, with Lord Coulsfield's judgment including a comprehensive discussion of the authorities.
13. There was also a review of the law by the Court of Appeal in Hall v. Woolston Hall Leisure Ltd [2001] ICR 99. That was a sex discrimination case, but both counsel agreed that the following passage in Peter Gibson LJ's judgment identifies the principles applicable to the present case:

"38. … 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 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 a sufficient degree of participation by the employee. And as the Coral Leisure Group case [1981] ICR 503 shows, even if the employee has in the course of his employment done illegal acts he may nevertheless be able subsequently to rely on his contract of employment to enforce his statutory rights. The Salvesen case [1994] ICR 409 on its facts was not a case of mere knowledge of the facts constituting illegality: the employee's involvement was much greater. The Hewcastle Catering case [1992] ICR 626 shows some of the factors which may be relevant to determining whether the statutory employment rights conferred on an employee are not to be defeated by illegality in the performance of the contract of employment."

14. Mr Tatton-Brown submitted, and we accept, that the crucial question for the tribunal was whether there came a point at which Mr Kaid's contract of employment – which was in principle a perfectly legal one – was performed in an illegal fashion in circumstances sufficient to deprive him of his right to enforce it in the way he sought to do before the tribunal. The tribunal answered this question against Mr Kaid, but Mr Tatton-Brown said that, in light of the guidance from the Woolston case, the tribunal had first to: (i) identify what facts rendered the performance of the contract illegal; (ii) find that Mr Kaid knew of those facts; and (iii) find also that he had actively participated in such illegality. Mr Basu agreed that those were the key matters the tribunal had to consider. Mr Tatton-Brown's submission was that the tribunal misdirected itself with regard to each of them. We will take each in turn.

1. Was the performance of the contract illegal?

15. The tribunal concluded in paragraph 6(i) that both Gruppo and Mr Kaid "were actively involved in denying the Inland Revenue income tax that was due to the Revenue." However, they nowhere else made any express finding that Gruppo failed to account to the Inland Revenue for the tax and national insurance due in respect of the cash payments to Mr Kaid. What they said in paragraph 6(i) was that "By suggesting the arrangement to boost [Mr Kaid's] income, and then not ensuring that the sums taken by [him] were properly accounted for and recorded so that income tax and could [sic] be deducted from them and paid to the Revenue, Ms Peyton set up a situation where sums due to the Revenue were not likely to be paid." (Our emphasis). And in paragraph 3(v) they said that "there is no evidence that [Gruppo] accounted to the Inland Revenue for income tax or national insurance due on these sums."
16. Mr Tatton-Brown submitted that the latter two findings were insufficient to justify the tribunal's conclusion that the performance of the contract was illegal. He said that, before they could do so, the tribunal needed to make a positive finding that Gruppo had not accounted to the Revenue for the relevant tax and national insurance contributions, whereas they made no such finding. He said that it would only be such an omission which could have rendered the performance of the employment contract illegal. In particular, Mr Tatton-Brown said that the tribunal were in error in focusing in paragraph 6(i) on the fact that Mr Kaid failed to declare the relevant payments in his own tax return. As a higher rate taxpayer, he was obliged to declare them even if Gruppo had accounted for tax in respect of them at the basic rate; but Mr Tatton-Brown said that any omission by Mr Kaid to do so (even if dishonest) could not justify the conclusion that the employment contract had been performed illegally, because the completion by Mr Kaid of his tax return was a personal matter, and was neither required by, nor performed in compliance with, his employment contract.
17. We agree with Mr Tatton-Brown that it was only the (if any) omission by Gruppo duly to account for basic rate income tax and national insurance contributions in respect of the cash payments that could amount to conduct rendering the performance of the employment contract illegal. The tribunal concluded (in paragraph 6(i)) that Gruppo was actively involved in denying the Inland Revenue income tax that was due to it, although the only primary findings they appear to have made relevant to this conclusion were (i) that it was likely that the sums due from Gruppo to the Revenue would not be paid, and (ii) that there was no evidence that they had been paid. They made no express primary finding that Gruppo did not in fact account for the relevant sums. The latter is a curious, and unsatisfactory, omission in the tribunal's reasons. It appears obvious to us, however, that the tribunal can only have arrived at the positive conclusion that they did on the basis that they were implicitly also making such a primary finding. In this connection it is relevant to note that it was apparently no part of Gruppo's case that it had ever deducted or accounted for the tax. Its case was that it disputed that the payments to Mr Kaid were by way of increased wages or salary at all: it claimed that they were merely advances against future salary, and were deductible from his salary in the following month. The tribunal rejected that case, and preferred Mr Kaid's case that the payments were by way of an agreed wage increase. It appears to us, however, that it was quite inconsistent with Gruppo's own case that it ever accounted for tax in respect of the payments, and this point cannot have been lost on the tribunal. In these circumstances, once the tribunal had rejected Gruppo's case on the facts and had accepted Mr Kaid's, we consider that they were entitled to come to the conclusion they did that Gruppo had been actively involved in denying the Inland Revenue income tax which was properly due to it. We are, therefore, satisfied that the tribunal were entitled to conclude, as they did, that the performance of the employment contract was illegal although we regard as unsatisfactory the manner in which they articulated their reasons for that conclusion.

2. Was Mr Kaid aware that Gruppo was not accounting for basic rate income tax and national insurance contributions?

18. Mr Tatton-Brown submitted that the obligation to pay basic rate income tax and national insurance contributions on the relevant payments was exclusively that of Gruppo. He said further that there was no evidence that Mr Kaid knew that Gruppo was not making the payments. He said that, so far as he recalled from the hearing, it was never put to Mr Kaid that he had such knowledge, and nor was there any evidence of any discussion or agreement between Mr Kaid and the Peytons on the subject. He said that, absent proof of any knowledge of these matters on the part of Mr Kaid, the second necessary ingredient of the illegality defence was not made out.
19. It is correct that the tribunal made no express finding that Mr Kaid knew that Gruppo was not accounting to the Revenue for basic rate income tax and national insurance contributions in respect of the cash payments. Had the point been put to Mr Kaid in the course of his evidence, we do not know what his response to it would have been. In this connection, it is, however, to be noted that he specifically refused to answer questions about his failure to declare the cash payments in his own income tax return, raising the privilege against self-incrimination. It was, therefore, no part of his own case that his failure to make such declarations was, for example, (i) an innocent mistake, or (ii) was based on an honest mistaken belief that Gruppo would have accounted for and paid all the income tax that was due in respect of such payments.
20. The critical question, however, is whether Mr Kaid knew that Gruppo was failing to account for the basic rate tax due on the cash payments he had drawn. We have referred to the tribunal's conclusion in paragraph 6(i) that both Gruppo and Mr Kaid were actively involved in denying the Inland Revenue tax that was due to it, and we have quoted that paragraph in full. But nowhere either there or anywhere else in the reasons can we identify any finding that Mr Kaid had the knowledge to which we have referred - and this means actual knowledge. It occurs to us that the provision to Mr Kaid by Gruppo of a P60 which made no reference to the cash payments (or, therefore, to any deduction of tax in respect of them) would or might have given him such knowledge, but the tribunal made no finding to this effect and nor did counsel address to us an argument to that effect.
21. Mr Basu's submission was, however, that the tribunal were entitled to infer from Mr Kaid's refusal to explain the omissions in his own tax return that he knew perfectly well that he was thereby cheating the Inland Revenue; and that he must also have known that Gruppo was similarly failing to make returns in respect of the cash payments, since otherwise his own personal fraud would be likely to be revealed. In this connection, he emphasised the oddness of the arrangement between Mr Kaid and the Peytons, namely one under which, when Mr Kaid wanted to take cash out of the company, he was required to sign for it in either Ms or Mr Peyton's name. Mr Basu submitted that the tribunal were, therefore, fully entitled to conclude that both Gruppo and Mr Kaid "were actively involved in denying the Inland Revenue income tax that was due to the Revenue" and that it was implicit in this that they were also finding that Mr Kaid also knew that Gruppo was engaging in a tax fraud.
22. We were for some time attracted by Mr Basu's submission, but have ultimately concluded that the tribunal have simply failed to make the vital findings of fact on this issue which the relevant principles required them to make. We are prepared to accept that it is possible that it is implicit in paragraph 6(i) that they were impliedly making the relevant finding. But, if so, they have so obscured it that we cannot be satisfied that they were in fact doing so. Moreover, findings of fact of this nature need to be clear and unambiguous.

3. Did Mr Kaid actively participate in Gruppo's illegality?

23. As we have said more than once, the tribunal found that both Gruppo and Mr Kaid were actively involved in denying the Revenue tax that was due to it. The tribunal's chosen language might suggest that they were finding that both parties were involved in a dishonest collaborative exercise, but they do not say so in terms and nor does their further analysis in paragraph 6(i) support the conclusion that they were so finding. Their analysis is, on one view, consistent simply with a finding that each of Gruppo and Mr Kaid was engaged in its and his own several fraud, but falling short of a finding that there was any knowing participation by Mr Kaid in Gruppo's illegality. On the other hand, had the tribunal found that Mr Kaid knew that Gruppo was not accounting for the sums due from it, it might perhaps have been open to them also to find that Mr Kaid's own dishonest tax returns played their part in covering up the falsity in Gruppo's returns. We do not say that the tribunal would have been bound so to find; but, had they done so, that might perhaps (although we do not say would) have justified a further conclusion that Mr Kaid had participated in Gruppo's own illegality

Conclusion

24. For the reasons given we have, therefore, decided that the tribunal failed to make any primary findings of fact sufficient to justify their conclusion that Mr Kaid was precluded by the principles of illegality from a remedy on the claims he was making. In particular, they made no clear findings (i) that he knew that Gruppo was not itself accounting to the Revenue for the sums due in respect of the payments; or (ii) that (and, if so, precisely how) Mr Kaid participated in Gruppo's illegal omissions in that respect.
25. If we had been satisfied that, on the basis of the evidence before the tribunal, there was simply no scope for findings adverse to Mr Kaid on points (i) and (ii) above, we would simply have allowed the appeal and made directions appropriate for the assessment of the compensation and other sums that the tribunal found were payable to Mr Kaid. We are, however, not so satisfied. We make clear that we are not thereby saying that the material before the tribunal justified the making of adverse findings of fact against Mr Kaid: had that been our view, we might well simply have dismissed the appeal. Whether or not any such findings could and should have been made on the basis of all the evidence was, however, a matter for the tribunal, who were the judges of fact. Our concern is that the tribunal simply failed to direct themselves with sufficient precision to the particular issues which the illegality point raised, and failed in consequence to make the factual findings which the point required them to make. In that respect, the tribunal therefore misdirected themselves with regard to the fair disposal of the issues they had to decide.
26. In these circumstances, we have decided that we cannot simply allow the appeal and direct an assessment of the compensation and other sums to which we have referred. We consider that the fair and proper course is instead to allow the appeal and to direct a re-hearing. That alternative is not one which was canvassed before us in argument by either side, but it is the order which, subject to the matters next raised, we propose to make.
27. This does, however, give rise to the further questions of (i) whether the re-hearing should be by the same, or a differently constituted, tribunal; and (ii) precisely what issues should be the subject of a re-hearing (our provisional view is that there is, for example, at least no obvious reason why Mr Kaid's claims in respect of holiday pay and unpaid salary, or his unsuccessful claim for the failure to pay him the £25,000 bonus, should be the subject of a re-hearing). We invite written representations from both counsel as to the matters raised in this paragraph and will make our decision on them after taking account of those representations.