United Kingdom Employment Appeal Tribunal

APPEARANCES

 

For the Appellant	Representations in writing
For the Respondent	No Appearance or Representation By or on Behalf of the Respondent

SUMMARY

Unfair Dismissal

Acquiescence / knowledge of illegality of contract prevented a claim for unfair dismissal.


 


HIS HONOUR JUDGE J McMULLEN QC

1. This case is about the application by an Employment Tribunal of the rules relating to illegality in the performance of a contract of employment: the Applicant paid no tax or national insurance. The judgment represents the views of all three members. We will refer to the parties as Applicant and Respondent.

Introduction

2. It is an appeal by the Applicant in those proceedings against a decision of an Employment Tribunal sitting at Sheffield, Chairman Mr J C Trayler, registered with Extended Reasons on 26 November 2003. The Applicant was represented by her husband, the Respondent did not attend. It is in liquidation.
3. The Applicant by an Originating Application made a number of claims under various provisions of the employment protection legislation. She sought a redundancy payment but she did not claim unfair dismissal. The Respondent denied dismissal, but if it were held she was dismissed it contended that the dismissal was for redundancy and was fair. It admitted a failure to provide a written statement of terms.

The Issues

4. The issues were set out by the Employment Tribunal as follows:

"1. The applicant confirmed that she complains of unfair dismissal, the failure of the respondent to provide payslips, failure to make a redundancy payment, breach of contract and failure to pay holiday pay. The respondent failed to attend. The applicant understood that the respondent company had ceased trading although it was not clear that it had become insolvent in any way which prevented the tribunal hearing complaints.

2. It appeared that the applicant received untaxed income and the legality of the employment contract, and its effect on the application in this case were considered by the tribunal."

5. The Tribunal decided that the contract of employment was tainted with illegality and thus the Applicant could enforce none of the statutory claims. Nevertheless, if it were wrong about illegality, it would have found that the Respondent constructively dismissed the Applicant, unfairly. It would have awarded compensation. It would further have found that the Respondent failed to provide pay statements and would have awarded compensation. It would not have found in the Applicant's favour in relation to her claim for unlawful deductions or holiday pay. On this alternative footing, it made no decision about the Applicant's claim for redundancy pay, although that would of course be subsumed within basic award which it would have made. It made no decision in respect of the admitted failure by the Respondent to provide a written statement of terms.

The Appeal

6. The Applicant appeals against the finding on illegality. She wants the matter to return to the Employment Tribunal for assessment of compensation or alternatively for the EAT to make the assessment. We thus take it that only the unfair dismissal and failure to provide pay statements issues are pursued.

EAT Directions

7. The Applicant was seeking an expedited hearing; directions were given in chambers by His Honour Judge Prophet. Because the case was expedited, no specific directions were given about evidence or fresh evidence, but paragraphs 7 and 8 of the Practice Direction applied. These set out the procedure which must be followed if there is to be an assertion on appeal about the nature of the evidence below.
8. The Applicant submitted a Skeleton Argument and asked for the matter to be dealt with by written submissions. The liquidators of the Respondent wished to take no part.

The Legislation

9. The right to be given an itemised pay statement is provided by the Employment Rights Act 1996, section 8:

8 "Itemised pay statement

(1) An employee has the right to be given by his employer, at or before the time at which any payment of wages or salary is made to him, a written itemised pay statement.

(2) The statement shall contain particulars of -

(a) the gross amount of wages or salary,

(b) the amounts of any variable, and (subject to section 9) any fixed deductions from that gross amount and the purposes for which they are made,

(c) the net amount of wages or salary payable, and

(d) where different parts of the net amount are paid in different ways, the amount and method of payment of each part-payment."

10. The right not to be unfairly dismissed is given to employees by section 94.
11. The Tribunal directed itself in accordance with the law as follows:

3. "In a case where the contract of employment is tainted with illegality a tribunal should consider whether it accords with public policy to hear any complaints based upon that contract. Although the position should be considered flexibly (Salveson v Simons [1994] IRLR 52) it will normally be the case that a party will not be able to enforce a contact [sic] which is illegal if that party was knowingly a party to the illegality, (Wilkinson v Lugg [1990] ICR 500)."

The Facts

12. The Applicant is Thai. She is married to Mr Timothy Wheeler. The Applicant was assisted by a translator. In her Originating Application it is asserted that she is not fluent in English. From 18 November 1999 to 28 January 2003 she was employed as one of the two chefs at the Respondent's Thai Royale restaurant in Sheffield. By the time of the termination of her employment after more than three years she was receiving £220 per week plus £40 tips. No deductions were made by way of tax or national insurance.
13. Only two payslips were issued to her dated 30 March and 14 September 2001. Each wrongly showed a gross wage of £72 per week, which was also the net figure. We take it from the Tribunal's reference to "tax years" that these represented respectively a cumulative tax year and half tax year. These represented payments of the equivalent of £72 per week throughout.
14. The Applicant was assisted by her husband throughout her employment. He had no difficulty of written and spoken English and was described as having:

9 "…a knowledge of the world and its affairs in the UK. Had Mrs Wheeler not had the assistance of her husband we may have taken a different view of her situation in view of her limited knowledge of tax and national insurance in the UK and her limited knowledge of the English language."

15. He himself had been declared bankrupt and was well-acquainted with the need to pay tax and national insurance.
16. The Applicant herself asked for payslips and was told it would be "straightened out" in January 2002 by her employer. No other documents were forthcoming by way of P60 and, as the Tribunal put it, "more pointedly as well she received nothing from Inland Revenue in terms of tax codes or other correspondence during the course of her employment." Mr Wheeler encouraged his wife to ask about payslips but he was "at least quite willing to acquiesce in the situation and for the arrangement to continue."
17. The Tribunal found that the Applicant initially innocently continued the arrangement but that Mr Wheeler chose to ignore the situation. The situation involved a benefit for over three years to both the Applicant and the Respondent. The Tribunal held that the amount of time this arrangement had continued was significant and "between them Mr and Mrs Wheeler must have known something was wrong. They will have made a choice to acquiesce."
18. This was held to be an illegal arrangement and the Applicant could not enforce her statutory claims for unfair dismissal and failure to make provision for itemised pay statements in those circumstances.

The Applicant's Case

19. In her Notice of Appeal, which is carefully drafted and argued, the Applicant makes three points:

(i) the Tribunal was wrong to attribute wrongdoing to the Applicant through the knowledge or acquiescence of her husband;

(ii) the decision was inconsistent with the evidence;

(iii) although the contract may have been performed illegally, and the Applicant benefited therefrom, the absence of active participation by the Applicant rendered the decision one which no reasonable Employment Tribunal could reach.

20. The Applicant relied on the judgment of the Court of Appeal in Hall v Woolston Hall Leisure Ltd [2001] 1 WLR 225 (CA) for the proposition that mere knowledge of illegality is itself insufficient to render a contract unenforceable; and on Inland Revenue Commissioners v Herd [1993] 1 WLR 1090 (HL) for the proposition that an employee is not liable to make returns to the Revenue in the absence of a direction from it, pursuant to Regulations 26 and 49 of the Income Tax (Employments) Regulations 1973. Illegality could not be established by the failure of the Applicant and her husband to refer the matter to the Revenue.
21. These points are developed in written submission.

Conclusion

22. The Applicant's second ground of appeal is based upon a contention as to the material put before the Employment Tribunal. Six separate assertions are made. In the absence of compliance with the procedures set out in Practice Direction paragraphs 8 and 9, these contentions cannot be accepted.
23. The starting point must be the unchallenged finding that the performance of the contract was illegal. No payments were made for tax or national insurance. The consequence was that both the Applicants and the Respondent benefited. Both those propositions appear to be accepted in Ground 3 of the Notice of Appeal.
24. The Applicant's complaint that much is attributed to her husband has some force. Yet the Tribunal made the free-standing finding that "between them", by which we understand the Tribunal to mean both of them, they "must have known something was wrong". They acquiesced in the illegal arrangement. Evidence of the illegal arrangement was plain to anyone receiving a payslip for £72 said to constitute both gross and net pay, and receiving in cash £260 (using the latest wage rate for convenience) on at least the two occasions when payslips were given. Further, since those payslips apparently recorded cumulative figure of respectively one year's and six months' gross pay at £72 per week, it would be instantly visible to the Applicant that she was receiving in her hand each week £190 more than the printed record showed.
25. Naturally, she asked her husband who was well acquainted with employment matters and relied on him but also herself made requests relating to payslips. It was of course open to the Tribunal to decide that the Applicant by reason of her status or language may not have had any improper involvement. But it did not. The Tribunal found that both she and her husband acquiesced. Is acquiescence enough to make the contract illegal in its performance?
26. In Hall (above) at 236 paragraph 38, Peter Gibson LJ said as follows:

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 Coral Leisure Group 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 on its facts was not a case of mere knowledge of the facts constituting illegality: the employee's involvement was much greater. The Hewcastle case 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."

27. That review included cases of constructive dismissal, which is of course the enforcement of a contract of employment. The decision in Hall was that unlawful participation in a contract did not defeat the Applicant's standing to bring a claim of sex discrimination for Ms Hall's acquiescence in the unlawful arrangement of her employer was not causally linked to her sex discrimination claim. This was because:

47 "…she was not herself guilty of any unlawful conduct. No benefit is shown to have been received by her from the employer's failure to deduct tax and national insurance contributions and to account for the same to the Revenue."

28. Mance LJ set out the principles as follows:

80 "In the present case, the position is in my view as follows:

(A) At the root of the industrial tribunal's and Employment Appeal Tribunal's decisions lies the proposition that Mrs Hall was involved in the illegality in a manner which would have prevented her from enforcing her contract of employment by any contractual claim. I agree with Peter Gibson LJ's conclusion that on the facts of this case this conclusion was itself in error. The contract as made and as varied was legal. It was at no stage expressly prohibited by any statute. The suggested illegality arose simply from the method of its performance, involving the employers' failure to make or account for deductions to the Revenue and DHSS, and issue of false PAYE slips. Before this could disable the appellant from enforcing her contract of employment, there would - applying the statements of Lord Denning MR at p.833 and Scarman LJ at p.836 in Ashmore, Benson Ltd v Dawson Ltd - have to be shown both knowledge and participation on her part in the illegal method of performance.

Thus, in Coral Leisure Group Ltd v Barnett the Employment Appeal Tribunal held that the industrial tribunal had jurisdiction in a claim for unfair dismissal under the Employment Protection (Consolidation) Act 1978, although after making an initially lawful contract, the relevant employee had knowingly participated in the finding of prostitutes for punters and in paying for them out of funds provided by his employers. The contract of employment itself, as distinct from the mode of its performance, was not prohibited by law: see per Browne-Wilkinson J at p.207. Even minor though inessential participation by an employee in a scheme for the fraudulent evasion of VAT by and for the benefit of his employers was held not to preclude a claim for unfair dismissal under the 1978 Act in Hewcastle Catering Ltd v Ahmed [1991] IRLR 473. The reasoning in that case was influenced by the 'public conscience' test, since rejected in Tinsley v Milligan. But the first five factors mentioned by Beldam LJ at p.477 would still point to the same conclusion, although it is unnecessary to form any decided view on that in this case.

Newland v Simons & Willer (Hairdressers) Ltd was concerned with a similar subject-matter to the present. But the employee had been employed over the end of a tax year, and any awareness on her part that proper deductions were not being made was said to have derived from her receipt of her P60 at the end of that tax year. In the view of the majority in the Employment Appeal Tribunal the essential question was 'Has the employee knowingly been party to a deception on the revenue?' However, I have to say, reading the judgment, that the majority appears also to have considered that it would be sufficient to make her 'party to the deception' if she either took part in 'or continued working knowing of the illegal mode of performance by her employers of her contract of employment': see p.363. Further, the majority took a stern view towards the argument that, even if the contract 'on its face or in its performance to his knowledge involves a fraud on the revenue", the employee should not be deprived of his rights under the employment protection legislation: see p.365. May J said:

'We have no doubt that Parliament never intended to give the statutory rights provided for by the relevant employment legislation to those who were knowingly breaking the law by committing or participating in a fraud on the revenue.'

We are not directly concerned with the employment protection legislation, and the facts are not identical with those in issue in Newland v Simons & Willer (Hairdressers) Ltd. But I confess to doubt about both the reasoning and the outcome in it.

In the present case also, the industrial tribunal evidently considered that knowledge alone would suffice. After contracting lawfully, Mrs Hall was given payslips which she queried. She was dismissed before the end of any tax year. The tribunal reasoned that she 'was turning a blind eye to the fact that the respondents were not paying tax on part of her income'. It is a fact that Mrs Hall continued to receive payslips and did not report her employers to any authorities. But, as Peter Gibson LJ has said, there was no positive duty on Mrs Hall to payor do anything (cf. IRC v Herd [1993] 1 WLR 1090), nor was she herself guilty of any unlawful conduct. Her continuing passive receipt of payslips, after her initial query, cannot in my view be regarded as making her a party to her employers' plan to deceive, or as amounting to participation in it such as to preclude her from enforcing her contract of employment. We need not consider what might have been the position after the end of a tax year, when it might have become her duty to make a tax declaration in respect of income which was to her knowledge untaxed. She was dismissed before any tax year had ever expired. I say only that I should require persuasion that non-compliance with a duty under the taxes legislation to make her own tax return then should be viewed as impliedly prohibiting or affecting the enforceability of her contract of employment. In these circumstances, I consider that the industrial tribunal and Employment Appeal Tribunal were wrong to regard Mrs Hall as involved in her employer's unlawful scheme in any way that disabled her under English law from enforcing her contract of employment, even if she had, by her present claim, been seeking to enforce it."

29. It seems from those statements that knowledge and participation of the illegality are essential. Those are issues of fact. Whether the employee benefits is obviously a very significant factor; in Hall the Applicant did not and was not debarred.
30. Plainly, in the assessment of the evidence, the length of time during which an arrangement, said to be illegal, continues can be significant. In the instant case, it was so held. It must be borne in mind that every week the Applicant received payment in cash and twice received payslips which were plainly wrong for each of the relevant weeks and by analysis reflected such incorrect figures throughout, respectively, the previous year and six months. The Tribunal was entitled to give weight to those features.
31. The Applicant benefited from this arrangement. That too was a factor to which the Tribunal gave weight. She was paid well above the national minimum wage. The Tribunal found that she knew something was wrong. That is a finding of fact in a highly fact-sensitive domain. Quite properly, the Applicant herself raised questions about this arrangement, but was content to acquiesce in the continuation of it, even after she had been assured that the problem had been "straightened out" for at least a year. Although the Applicant was under no duty herself to account to the Revenue, an assurance that the matter would be straightened out was not followed by any communication from the Revenue relating to PAYE codings, nor indeed did she receive a P60 at the end of each of the three tax years which ended during her career. The Tribunal regarded this too as "pointed".
32. The Applicant was relying upon her husband who understood employment working and the need to pay tax. The Tribunal directed itself correctly as to the test to be applied (see the citation from paragraph 3 above). It obviously equated knowingly being a part to acquiescence in the form in which it was used in its reasons. The Applicant knew there was something wrong and must have continued in that knowledge despite the assurance from the employer, since nothing changed and she received no communications from the Revenue or her employer.
33. The Tribunal was entitled to find that these facts demonstrated knowing acquiescence in the continuation of wrongdoing and that the contract was illegal in its performance. Although expressed as acquiescence, the reality of the Employment Tribunal expression is that the Applicant participated. The contract could not be enforced. That was a conclusion open to the Tribunal on the facts before it. The appeal is dismissed.