Enfield Technical Services Ltd v Payne & Ors

The Court of Appeal dismissed the appellants' appeals and upheld the Employment Appeal Tribunal's approach. The court held that a contract of employment will not be treated as unlawfully performed merely because the parties wrongly (but in good faith) characterised the relationship as self-employment and the employer did not operate PAYE accordingly. For a contract to be tainted by illegality so as to bar an unfair dismissal claim there must be some form of misrepresentation or attempt to conceal the true facts of the relationship (for example, a false representation to the Revenue that taxable salary was non-taxable expenses). Mere miscategorisation, even when it has the effect of deferring or altering tax payment, will not of itself render the contract unenforceable.

Background and facts:

• Two separate unfair dismissal claims were before the court. In Payne the employer (Enfield) had treated the claimant as self-employed under a subcontractor document; the Inland Revenue had on enquiry taken the view that the matter was finely balanced and was prepared to accept self-employment. Payne was later dismissed and claimed unfair dismissal.
• In Grace the claimant performed services for BF Components, initially paid at a gross daily rate and treated as self-employed; the employer later insisted he sign employment particulars and he did so after consulting ACAS. His employment was later terminated and he claimed unfair dismissal but the Employment Tribunal held he lacked the qualifying period because earlier service was tainted by illegality.

Procedural posture: Both matters proceeded from Employment Tribunals to the Employment Appeal Tribunal (EAT) (Elias J), which decided both appeals together on the application of the doctrine of illegality to unfair dismissal claims (EAT decision: 25 July 2007). The present appeals were to the Court of Appeal ([2008] EWCA Civ 393).

Nature of the claim and relief sought: Both respondents sought to rely on a period of employment so as to bring unfair dismissal claims under the Employment Rights Act 1996 (notably s.94(1) and the qualifying period in s.108).

Issues framed by the court:

1. Whether contracts that were, in substance, contracts of employment but treated by the parties as contracts for services were unlawfully performed so as to bar an unfair dismissal claim.
2. Whether mere non-compliance with tax obligations or a beneficial tax treatment arising from a misclassification suffices to render the contract illegal, or whether there must be a misrepresentation as to the underlying facts of the relationship (for example, to the Revenue).

Court’s reasoning and conclusion:

• The court reviewed relevant authority (including Holman v Johnson, Salvesen v Simons, Hall v Woolston Hall Leisure Ltd, Miller v Karlinski and the recent EAT decision in Daymond) and agreed with the EAT that the essential feature in cases where illegality has been found is that the parties knowingly entered into arrangements which misrepresented the facts of the employment relationship.
• The court rejected the submission that any non-compliance with tax statutes or any resultant fiscal advantage necessarily renders the contract unlawfully performed. Instead, there must be some form of misrepresentation, express or implied, or an attempt to conceal the true facts, before public-policy driven illegality will deprive an employee of statutory protection.
• Applying those principles, the court held that the Employment Tribunal and the EAT were entitled to find that in Payne there was no unlawful performance and that the Revenue had at one stage accepted the self-employment characterisation; and in Grace, although he actively participated in the arrangement, he acted in good faith and made full disclosure to the Revenue, so his conduct did not amount to unlawful performance.

Implication: The decision emphasises that the illegality defence to statutory employment claims requires more than an erroneous characterisation that affects tax treatment; it requires misrepresentation or concealment of the true facts.

Appeals dismissed. The Court of Appeal agreed with the Employment Appeal Tribunal that mere misclassification of a working relationship, even if it affects tax treatment, does not render a contract unlawfully performed for the purposes of defeating an unfair dismissal claim. Illegality sufficient to bar such claims requires a misrepresentation or concealment of the true facts of the relationship (for example, to the Revenue). Applying that test, the contracts in the two cases were not unlawfully performed and the EAT’s conclusions were correct.

Employment Tribunals: Reading ET (25 October 2006) (Payne) and Brighton ET (10 April 2006) (Grace). Employment Appeal Tribunal (Elias J) decisions UKEAT/0644/06/MA & UKEAT/0367/06/MAA handed down 25 July 2007 (EAT dismissed Enfield's appeal and allowed Grace's appeal on the illegality point). Appeal to the Court of Appeal: [2008] EWCA Civ 393 (22 April 2008) which dismissed the appeals against the EAT's decision.