Enfield Technical Services Ltd v Payne & Ors

A contract of employment is not unlawfully performed merely because the parties wrongly but genuinely classify the employee as self-employed and consequently use the wrong tax regime. In a fiscal case of this kind, illegality requires an express or implied misrepresentation to the Revenue about the underlying facts of the relationship.

The employee must know the facts which make performance illegal and participate actively and knowingly in that performance. The employee need not appreciate that the conduct is unlawful. A purported classification may nevertheless amount to misrepresentation and bad faith where the circumstances show an attempt to conceal the true facts.

Two employers appealed from a single judgment of the Employment Appeal Tribunal, which had considered together two unfair dismissal cases concerning the illegality doctrine. One employment tribunal found that Mr Payne's contract was not tainted by illegality. Another held that Mr Grace could not rely on his earlier service because he had participated in the unlawful performance of a contract presented as self-employment.

The Employment Appeal Tribunal dismissed Enfield's appeal and allowed Mr Grace's appeal. It found that neither employee had misrepresented the underlying facts to the Revenue merely by adopting an ultimately incorrect legal classification.

The central issue was whether knowing participation in an erroneous self-employment arrangement, with resulting non-compliance with fiscal obligations, was sufficient to make an employment contract unlawfully performed and prevent reliance on statutory unfair dismissal rights.

1. The appeals were dismissed unanimously. The Employment Appeal Tribunal had correctly held that both contracts were not unlawfully performed.

2. Where illegality is alleged in the performance of an otherwise lawful employment contract, the employee must know the facts which make the performance illegal and participate actively and knowingly in that performance. Knowledge that the conduct is legally unlawful is unnecessary. The approach in Hall v Woolston Hall Leisure Ltd [2000] IRLR 578 was applied.

3. In a fiscal case arising from the misclassification of an employee as self-employed, breach of the employer's fiscal obligations is insufficient by itself. There must also be an express or implied misrepresentation to the Revenue about the underlying facts. Miller v Karlinski [1945] 62 TLR 85 and Salvesen v Simons [1994] IRLR 52 involved false descriptions of salary as expenses or remuneration as payment for services supposedly supplied by another entity.

4. A genuine error in characterising an employment relationship differs from a false representation about the work performed or the basis of payment. The difficulty and fact-sensitive nature of the distinction between employment and self-employment made it inappropriate to deprive an employee of legal protection merely because the parties' initial classification was later rejected. The possible tax advantages of self-employment did not alter that conclusion.

5. The width of the reasoning in Daymond v Enterprise South Devon [UKEAT/0005/07], suggesting that an employee who positively chose arrangements depriving the Revenue of tax bore the consequences regardless of a genuine belief in their legality, was too broad. Misclassification may still amount to misrepresentation and bad faith where its circumstances reveal an attempt to conceal the true facts.

6. Mr Payne had disclosed the relationship to the Revenue, which had accepted self-employed status following enquiries. Mr Grace acted in good faith, made full disclosure and reasonably took time to consult ACAS after his employer changed its position. Neither had unlawfully performed his contract, and Mr Grace's short period of consultation did not interrupt his qualifying employment.

1. Court of Appeal (Civil Division): Dismissed both employers' appeals and affirmed the Employment Appeal Tribunal's disposition: [2008] EWCA Civ 393.
2. Employment Appeal Tribunal: In UKEAT/0644/06/MA and UKEAT/0367/06/MAA, dismissed Enfield's appeal concerning Mr Payne and allowed Mr Grace's appeal from the Brighton Employment Tribunal.
3. Employment Tribunals: The Reading tribunal rejected Enfield's illegality defence and found Mr Payne to be an employee. The Brighton tribunal held that Mr Grace could not establish the necessary continuity because his contract had been unlawfully performed, alternatively because continuity had been interrupted.