Connolly v Whitestone Solicitors

Illegality in the performance of an employment contract requires more than an erroneous classification of an employment relationship or the employee’s knowledge of the resulting tax treatment. The employee must have knowingly participated in an illegal performance, involving an express or implied misrepresentation of the facts to the Revenue.

An employee who knows that a claim to self-employed status is unsustainable, but nevertheless makes that claim, implicitly misrepresents his own belief and acts in bad faith. It may then be contrary to public policy to permit an employment claim. Such cases are rare. A finding of this seriousness must be put squarely to the employee, addressed fairly in the reasons, and supported by findings dealing with the employee’s explanation.

The Claimant worked as a solicitor for the Respondent from September 2006 until July 2009. The Employment Tribunal found that he was an employee, although the parties had agreed that he would be treated as self-employed for tax purposes and he had submitted invoices and self-assessment returns on that basis.

The Employment Judge raised illegality of performance herself and dismissed the Claimant’s unfair dismissal, breach of contract and holiday pay claims on public policy grounds. The appeal concerned whether the legal test for illegality had been applied correctly and whether the Claimant had been given a fair opportunity to address the allegation that he knowingly claimed an unsustainable self-employed status.

1. Appeal allowed. The Employment Judge’s conclusion that the contract was illegally performed and that the claims could not proceed could not stand. The matter was remitted for a rehearing before a freshly constituted Tribunal.
2. The principles in Enfield Technical Services v Payne required more than a subsequent finding that the parties had wrongly characterised an employment relationship, or that the Claimant had chosen self-employed status for its financial advantages. A third-category illegality case required illegal performance, knowledge of the facts making the performance illegal, and active participation.
3. In this context, an express or implied misrepresentation as to the facts of the employment relationship was required. A mere error of categorisation, without false representation, did not ordinarily taint the contract with illegality. The question was not whether the parties’ legal characterisation was ultimately correct, but whether the Claimant knew that claiming self-employed status was unsustainable.
4. Where a taxpayer claimed self-employed status while knowing that he was not entitled to do so, he implicitly misrepresented his own belief to the Revenue and acted in bad faith. Public policy could then prevent him from obtaining assistance in an unfair dismissal claim. The situation was exceptional because employment status could be difficult to determine and there was no bright line between employment and self-employment.
5. The Employment Judge had been entitled to raise illegality. However, her findings that the arrangement was not based on a genuine belief and was financially advantageous did not directly establish knowledge that the self-employed claim was unsustainable. She also failed adequately to address the Claimant’s evidence that he believed he could work as a self-employed locum and later sought to regularise his position.
6. Because the allegation involved a serious finding of bad faith, it had to be put fairly and squarely to the Claimant. The Respondent had accepted that this had not occurred. The rehearing was to take place afresh with both parties understanding the precise issue.

• Employment Appeal Tribunal: allowed the appeal against the Employment Tribunal’s judgment dated 3 June 2010 and remitted the illegality issue for a fresh rehearing.