Employees cannot claim breach of contract if the contract itself is shown to be illegal. In Pickard v Hughes t/a The Tanning & Beauty Kabin the Employment Appeal Tribunal (EAT) said that in order to establish that the contract was illegal, tribunals needed evidence of bad faith on the part of the employer and that the employee had “actively participated” in the illegality.

Basic facts

Ms Pickard worked as a beautician for the Tanning and Beauty Kabin from 2004 to 2008. During that time, she was not given a written contract or statement of her terms and conditions and was paid £120 per week “cash in hand” for 40 hours’ work.

She brought a claim for unlawful deduction of wages on the basis that her employer had failed to pay her the minimum wage under the National Minimum Wage (NMW) Regulations, among other things.

Tribunal decision

The tribunal dismissed her claim, saying that it was not satisfied that she genuinely believed that tax and national insurance (NI) had been deducted at source by her employer from her weekly wages. It also decided that she had colluded with her former employer in avoiding the payment of tax and NI.

As such, the contract had been “performed in an illegal manner” and amounted to a fraud on the Inland Revenue. The Tribunal therefore dismissed her claim on the ground that the contract was “tainted with illegality”.

EAT decision

The EAT, however, disagreed. It said that the issues to decide were whether the contract had been performed illegally and whether Mrs Pickard had participated in the illegality.

It said that there were two steps required to find “illegal performance” of a contract. The first was to establish that Mrs Pickard was an employee and that her employer had failed to pay PAYE on her earnings. The second, as confirmed in Enfield Technical Services Ltd v Payne, was to show “bad faith” on the part of the employer.

Although the judge clearly thought there was bad faith (stating in his findings that Ms Pickard colluded with her employer to avoid paying tax), he was not entitled to come to that conclusion as he had not heard any evidence from the company and very little from the claimant herself on this point.

The EAT therefore felt it had no option but to conclude that the judge’s decision was inadequately reasoned and could not stand in law. However, even if it were wrong on this point and the contract was illegal, the question remained whether Ms Pickard had “participated in that illegality”.

Again, the EAT found that the judge’s findings were unsatisfactory as case law showed that “passive acquiescence” in a misrepresentation by an employer was not enough. There had to be an element of “positive participation” on the employee’s part.

Although the Tribunal judge had found “collusion”, he also found that Mrs Pickard was probably “not bothered” whether her employer was paying tax or not. That, said the EAT, seemed to be “wholly inconsistent with a finding of participation”.

As to Ms Pickard’s argument that a failure to pay PAYE was not relevant to a claim under the NMW Regulations, the EAT said that her claim would still be “tainted with illegality” if it was shown she had voluntarily participated in that illegal failure.

It therefore allowed the appeal and remitted the case to be heard by a fresh tribunal.