The claimant was paid £120 per week ‘cash in hand’ until she left the respondent’s employment. She brought proceedings against them, claiming principally that she had not been paid the minimum wage. The Employment Judge questioned the claimant about the sums which had been paid to her, in particular whether tax and national insurance had been deducted at source by the respondent. He concluded that the claimant knew, or ought reasonably to have known, that the remuneration paid to her should have been subject to deductions and that she had colluded with the respondent in avoiding the payment of tax and NI. Both the claimant and respondent were party to a contract which was being performed in an illegal manner, and therefore the claim was tainted with illegality.

The EAT concluded that, as the EJ had heard no evidence from the respondent about the tax and NI position, and the account from the claimant was so exiguous that it was difficult to test whether the inference of bad faith in this case was a safe one, his decision was inadequately reasoned and could not stand. Even if the EAT was wrong on this point, the finding of collusion on the part of the claimant implied that she had actively associated herself in the respondent’s conduct, but there was no indication of what that active participation consisted of.

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Appeal No. UKEAT/0185/10/LA

EMPLOYMENT APPEAL TRIBUNAL

58 VICTORIA EMBANKMENT, LONDON EC4Y 0DS

At the Tribunal

On 28 January 2011

Before

THE HONOURABLE MR JUSTICE UNDERHILL (PRESIDENT)

(SITTING ALONE)

MS R PICKARD (APPELLANT)

LYNN HUGHES T/A THE TANNING & BEAUTY KABIN (RESPONDENT)

Transcript of Proceedings

JUDGMENT

**APPEARANCES**

For the Appellant
MR KRISTIAN WOOD (Solicitor)
Rochdale Law Centre
15 Drake Street
Rochdale
Lancashire
OL16 1RE

For the Respondent Written Submissions

**SUMMARY**

JURISDICTIONAL POINTS – Fraud and illegality

Judge dismissed claim under National Minimum Wage Regulations on the basis that employee had "colluded" in her employer's failure to pay PAYE.

**Held**: No sufficient basis for such a finding.**THE HONOURABLE MR JUSTICE UNDERHILL (PRESIDENT)**

1. The Appellant worked in the Respondent's beauty salon from July 2004, when she was aged 20, to December 2008. She says in her ET1 that she worked as a beautician but also that she was in practice for much of the time the only person working in the salon and de facto in charge of it. She at no time received any written contract or statement of her terms and conditions. She brought proceedings in the Employment Tribunal complaining principally of unlawful deduction from her wages by reason of non-payment of the minimum wage, though there were also claims for failure to provide written terms and conditions of employment, failure to provide adequate written pay statements and a claim under the Working Time Regulations in relation to annual leave. The total amount claimed was over £13,000.

1. Her case came on for hearing before Employment Judge Coles, sitting alone, in Manchester on 4 September 2009. He dismissed the claim, at the end of the Appellant's case, on the basis that it was tainted by illegality. That point had not been pleaded or otherwise taken by the Respondent. It was one that the Judge took for himself, as in principle he was entitled to do.

1. Although the Judge plainly gave his decision on 4 September, and appears to have given oral reasons for it on that occasion, the formal Judgment was not supplied until 9 October, together with written Reasons which the Appellant had requested. The Reasons are short. I need not set out the first three paragraphs, which are purely introductory, but I should set out paragraphs 4 to 12, which contain the entirety of the reasoning. These are as follows:

"4. During the course of the claimant's evidence, she told me that, from the commencement of working for the respondent in July 2004, she was paid, normally, £120 per week. This continued until she ceased working for the respondent on 2 December 2006.

5. All sums that were paid to the claimant by the respondent were in cash. From August 2004, this was generally £120 per week which, the claimant contended, was for a working week of forty hours and therefore below the national minimum wage.

6. I asked the claimant what she considered the arrangements were in respect of her remuneration for deduction of tax and national insurance. She seemed very vague about this but suggested that the sum that she received was the net amount after deduction of tax and national insurance by the respondent. However she could not put forward any suggestion as to the gross weekly wage she was supposed to be entitled to, nor did she say the respondent had agreed to this.

7. Her frequent reference to being paid 'cash in hand' was explored further by me. She did not satisfy me that she genuinely believed that tax and national insurance were being deducted at source by the respondent. The amount she received was simply 'cash in hand'.

8. On the basis of the evidence the claimant presented to me, I came to the following conclusions:-

a. The claimant knew or ought reasonably to have known that remuneration paid to her should have been subject to deductions of tax and national insurance.

b. The claimant knew that the respondent was not paying to the Inland Revenue tax and national insurance in relation to her remuneration or, alternatively, was not bothered whether such was being done or not.

c. The claimant herself, whether she regarded herself as self-employed, a worker, or an employee, was not accounting for tax or national insurance herself to the Inland Revenue and had no intention so doing.

9. I was satisfied on the claimant's own evidence, that the claimant was colluding with the respondent in avoiding the payment of tax and national insurance in relation to the remuneration she was receiving.

10. The claims which the claimant was pursuing related to her contractual relationship with the respondent, as opposed to any collateral contract.

11. In my judgment, therefore, both the claimant and the respondent were party to a contract which was being performed in an illegal manner in that the method of remuneration amounted to a fraud on the Inland Revenue.

12. Such contract as existed between them, therefore, is unenforceable as being contrary to public policy."

1. Not only are those Reasons short, as I have said, but even though they had been reserved they contain no discrete self-direction on the relevant law. I am all for succinctness but nevertheless a Judge in giving Reasons ought clearly to spell out the analytical process which he is following. As will appear, I fear, no such analysis is detectable here.

1. The Appellant's appeal was initially rejected by HHJ Serota on the sift but at a hearing under rule 3 (10) of the Employment Appeal Tribunal Rules 1993, HHJ Pugsley allowed it to proceed to a preliminary hearing. Sensibly, HHJ McMullen QC subsequently converted that to a direction for a full hearing, which is what is now before me.

1. The Appellant is represented by Mr Kristian Wood of the Rochdale Law Centre. I am grateful to him for his clear and well focused Notice of Appeal and skeleton argument. The Respondent has said that she will not be attending and that she wishes to rely on written submissions. Those submissions essentially adopt the reasoning of the Judge and of Judge Serota in his initial rejection of the appeal under rule 3 (7). I have paid due regard to those materials.

1. The law in this area has recently been clarified by the decisions of the Court of Appeal in Hall v Woolston Hall Leisure Ltd [2001] ICR 99 and Enfield Technical Services Ltd v Payne [2008] ICR 1423. I need not analyse their effect in any detail. This is a case in the third category identified by Peter Gibson LJ in Hall (see paragraph 32) - that is, a case where any illegality consists in the way in which the contract on which the claim is based has been performed. The issues therefore are (a) whether the contract was indeed being illegally performed; and (b) whether the Appellant voluntarily participated in that illegal performance.

1. As to (a), the illegal performance relied on by the Judge was the non-payment of tax to the Revenue on the Appellant's earnings. The first step in the analysis must be to identify with more precision what the breach of obligation which that involved was and, more particularly, whose breach. If the Appellant was employed under a contract of service, the breach was the Respondent's, because it was her obligation to pay the tax under PAYE. If, by contrast, the Appellant was employed under a contract for services the breach was her own.

1. The Judge makes no express finding on this question, but the necessary implication of paragraph 8 (a) of the Reasons is that he believed that the Appellant was in fact an employee. Although it would have been better if he had spelt out his reasoning on that point more fully, it is clear that that is a conclusion to which he was entitled to come. It is indeed prima facie the obvious conclusion in the case of an employee who has been working apparently full-time, and on a permanent basis, in the capacity that the Appellant appears to have been working. It seems to me that the Judge was also plainly entitled to find that the Respondent was not deducting PAYE. If she was, the Appellant would have known because she would have been given the appropriate paperwork. It follows from those two points taken together that the Judge was entitled to find that the Respondent was in breach of an obligation to pay PAYE.

1. That establishes the necessary first step for a finding of illegal performance, but it is not by itself conclusive. As was confirmed in Enfield, a failure by an employer to pay tax under PAYE on an employee's earnings does not necessarily constitute unlawful performance of a contract of employment. It will do so if, but only if, there is bad faith involved. The Judge evidently believed that that was the case. Again, he does not say so in terms but such a finding is necessarily implicit in the finding of "collusion" in paragraph 9 of the Reasons. The Appellant submits that he was not entitled to make such a finding. This was not a case where there was evidence that any misrepresentation had been made by the Respondent to the Revenue. In that connection it was significant that the Judge had heard no evidence from the Respondent. At most it was a case, so far as the evidence went, of a failure to declare.

1. I do not accept that the absence of a (proved) misrepresentation renders impossible a finding of bad faith on the Respondent's part. On the contrary, a deliberate failure by an employer to declare to HMRC that he has an employee in respect of whom he is obliged to pay PAYE is in my view plainly bad faith. It is clear from the judgment of Elias J in this Tribunal in Enfield, expressly endorsed by the Court of Appeal, that concealment just as much as misrepresentation can constitute bad faith in this context.

1. However, the question is whether there was evidence on the basis of which the Judge could properly find that that is what happened in this case. I am tempted to say that there was. It is hard to think that the Respondent was in any real doubt as to her obligation to pay PAYE in respect of the Appellant. The situation is very different from that in the two cases considered in Enfield, where the position of the putative employee was genuinely in a grey area between employment and self-employment. However, as I have already observed, the Judge heard no evidence from the Respondent, and his account of the evidence that he heard from the Appellant is so exiguous that it is difficult to test whether the inference of bad faith in this case was indeed a safe one. It is possible that there may be circumstances which render the case less straightforward than appears. On balance, though not without misgivings, I feel obliged to conclude that his decision on this point is inadequately reasoned and therefore cannot stand in law.

1. However, even if I were wrong about that, there is a further difficulty when we come to what I have described as element (b). Even if the Respondent's performance of the contract was illegal, the question remains whether the Appellant participated in that illegality. The Judge's findings on this aspect are clearly unsatisfactory. The authorities establish that mere passive acquiescence in a misrepresentation – or, I would add, and perhaps a fortiori, concealment - by his or her employer is not enough: there needs to be an element of positive participation. But the Reasons contain no examination of the Appellant's knowledge or state of mind about the arrangement under which she was paid cash-in-hand. Did she, for example, positively seek such an arrangement herself or was it simply presented to her by the Respondent as a fait accompli ? It is true that the finding of "collusion", in paragraph 9 of the Reasons, ought to imply a finding by the Judge that the Appellant had indeed actively associated herself in the Respondent's conduct; but there is no indication of what that active participation consisted of and, importantly, such a finding would be inconsistent with the Judge's express acknowledgement, at paragraph 8 (b) of the Reasons, that the Appellant's state of mind might simply have been that she was "not bothered" whether the Respondent was paying tax or not. That may - I do not have the material to know - have been a generous finding, but once it is acknowledged as a possibility it seems to me wholly inconsistent with a finding of participation.

1. I must accordingly allow this appeal and remit the case to the Tribunal in order to hear and determine the substantive issues in the Appellant's claim. I ought, however, to make it clear that since my decision is based on the way in which the Judge approached the issues before him and the inadequacy of his findings, that reasoning does not rule out the possibility that a Judge with more evidence before him, or at any rate who makes fuller findings on whatever evidence is before him, might be in a position properly to reach the same conclusion that Judge Coles did. I do not recommend a separate hearing in order to determine that issue, since the Respondent does not seek one, but the parties need to be aware that it may, depending on the view taken by the Judge, raise its head again and they should be in a position to deal with it if it does.

1. Subject to that, the Judge conducting the re-hearing should do so with a clean slate. He is not bound by any of the findings that Judge Coles may have made, including in particular the finding as to whether or not the Appellant was an employee. I have expressed a provisional view about that, but that view should not bind the Judge if the evidence before him points to a different conclusion.

1. Mr Wood did not in his skeleton argument take any general point as to whether, if illegality had been established, the Appellant's claim was not tainted by it. He was right not to do so. Claims of the kind with which we are concerned here seem to me plainly to be based on the existence of the contract. He did, however, take a more particular point, to the effect that a failure to pay PAYE could not be relevant to a claim under the National Minimum Wage Regulations since such a claim did not require the existence of a contract of employment: it was enough that the claimant should be a 'worker' as defined in the Act. That does not seem to me to be quite the right way of putting it. If the Appellant was in fact an employee, it seems to me clear that if she voluntarily participated in an illegal failure on the part of her employer to pay PAYE that would be sufficient to taint her claim with illegality. If in the end the view of the Tribunal were to be that she was not employed under a contract of employment, the nature of any illegality would be different and would require a separate analysis on which I have not needed to hear argument.

1. I would, lastly, observe that the uncertainties in this case are such that it would plainly be in the interests of both parties to consider settlement. Mr Wood indicated to me that he had been willing to approach the Respondent on this basis but had found it difficult to communicate with her. I shall make no comment on that, not having heard her side of the story, but I would urge her to consider the position carefully, with the benefit of legal advice if possible and, subject to that advice, be willing to engage in constructive discussions with the Appellant's representatives.