Enfield Technical Services v Payne and Grace v BF Components Ltd
If someone tries to bring an unfair dismissal claim based on an illegal contract, the courts will generally not find in their favour as a matter of public policy.
In the combined cases of Enfield Technical Services v Payne and Grace v BF Components Ltd, however, the Employment Appeal Tribunal (EAT) made clear that for the contract to be illegal, the parties had to have actively tried to hide the true facts of the relationship.
Basic facts
Enfield Technical Services (ETS) v Payne
Mr Payne agreed to work exclusively for ETS as a self-employed contractor. In March 2006, he claimed he had been unfairly dismissed. ETS said he was not an employee; or if the court found that he was, that his contract was illegal because both he and his employer had represented him to the tax authorities as being self-employed.
The tribunal decided that he was an employee, but that there was nothing “inherently illegal” about his contract as “arguments could be raised in support of self employment status or employment status.” ETS appealed.
Grace v BF Components Ltd
Mr Grace claimed unfair dismissal in January 2004 when his contract was terminated. His employer said he did not have the requisite service as he had been self-employed until September 2003.
Not only that, but they argued that his contract was illegal. BFC said that both they and Mr Grace had told the Revenue that he was self-employed, when, in fact, they knew he was an employee. Since his contract had been illegal until September 2003, Mr Grace could not establish the necessary continuity of service.
The tribunal agreed that, by August 2003, Mr Grace was aware that his employer should be paying tax and national insurance on his behalf. Nevertheless he insisted for a further three weeks on retaining his self-employed status. That period of “illegal performance” had broken his continuity of service.
Mr Grace appealed.
EAT decision
The EAT said that the essential feature of illegality “is that the parties have knowingly entered into arrangements which have to their knowledge represented the facts of the employment relationship to be other than that they really were.”
That did not, however, include situations that “have the effect” of depriving the Revenue of tax. Instead “there must be some form of misrepresentation, some attempt to conceal the true facts of the relationship, before the contract is rendered illegal for the purposes of a doctrine rooted in public policy.”
ETS v Payne - the EAT said that, in this case, there was no misrepresentation as the Revenue was aware of the set up from the beginning. The fact that the parties got it wrong was neither here nor there. “It would be absurd if a contract were held to be illegal because the parties in good faith thought that it could legitimately be considered to fall into one legal category whereas in fact it fell into another…. As the Tribunal here noted, there is often a fine dividing line between those properly described as employees and those who are self employed”.
Grace v BFC – This case was not as clear cut because by August 2003 the employers had made it clear to Mr Grace that he should be treated as an employed person. Despite that, he continued to resist their decision for as long as possible.
The EAT accepted “that on occasions where the parties have sought to claim self employed status knowing that this was not sustainable then it might be legitimate to infer that they are seeking to misrepresent the true nature of their relationship. It is not, however, the mischaracterisation of the legal status which is the relevant misrepresentation; it is the implicit representation about the underlying facts of the relationship. The only evidence of that here is the finding that he continued to want to be treated as self employed even after the company had told him that in their opinion he plainly was not.”
It concluded that once the company made their position clear to Mr Grace, he accepted it soon afterwards. The fact that he delayed for a few weeks could not be said “to constitute a misrepresentation of the facts of the relationship such as to render the contract illegal.”