Pickard v. Lynn Hughes (t/a The Tanning & Beauty Kabin)

Illegality in the performance of an employment contract requires careful analysis of both the employer’s conduct and the claimant’s participation. A failure to operate PAYE is not necessarily unlawful performance. It becomes unlawful where the employer acted in bad faith, including by deliberate concealment of the employment. The claimant must also have positively participated in the illegality. Mere passive acquiescence, or indifference to whether tax was paid, is insufficient. Findings of collusion must identify the conduct constituting active participation and must be supported by adequate reasoning. Where those issues are inadequately determined, the claim should be reheard rather than dismissed on illegality grounds.

The claimant worked in the respondent’s beauty salon and brought Employment Tribunal claims concerning the national minimum wage, written employment particulars, pay statements and annual leave. The Employment Tribunal dismissed the claims at the end of the claimant’s evidence, holding that the contractual relationship had been performed illegally because PAYE and national insurance had not been paid and that the claimant had colluded in the arrangement.

The claimant appealed. The Employment Appeal Tribunal considered whether the respondent’s failure to operate PAYE amounted to illegal performance and whether the claimant had voluntarily participated in that illegality.

1. The appeal was allowed and the claims were remitted for rehearing. The Employment Tribunal’s reasoning did not adequately establish the necessary elements of illegality.
2. The case concerned illegality in the performance of the contract. The first questions were whether the contract was being illegally performed and whether the claimant voluntarily participated in that illegal performance.
3. If the claimant was an employee, the respondent was responsible for operating PAYE. The respondent’s failure to declare the employment could amount to bad-faith performance. Under Enfield Technical Services Ltd v Payne [2008] ICR 1423, however, failure to pay tax under PAYE is not automatically unlawful performance; bad faith is required. Deliberate concealment may constitute bad faith as well as misrepresentation.
4. The Employment Tribunal’s findings did not safely establish bad faith. The absence of evidence from the respondent and the brevity of the claimant’s evidence made the inference inadequately reasoned.
5. In any event, the claimant’s participation was not properly analysed. Mere passive acquiescence in an employer’s misrepresentation or concealment is insufficient. Positive participation is required. The finding of collusion did not identify what active conduct constituted participation and was inconsistent with the possibility that the claimant was merely indifferent to whether tax was paid.
6. The rehearing was to proceed with a clean slate. The tribunal was not bound by the earlier findings, including the provisional view that the claimant was an employee. A fresh tribunal might reach the same conclusion if fuller findings and evidence justified it.

• Employment Appeal Tribunal: Allowed the appeal and remitted the substantive claims for rehearing.
• Employment Tribunal: Dismissed the claims at the end of the claimant’s case on the ground that the contractual relationship was tainted by illegality.