Employment Update: Illegal contracts

13 May 2008

Is it unlawful performance of a contract when a self-employed contractor works under a contract which a tribunal later decides is actually an employment contract? It depends on the extent to which the parties have misrepresented the true position, in particular to HMRC

The Court of Appeal has recently considered two cases, Enfield Technical Service v Payne; and BF Components Ltd v Grace where the claimants, both of whom had worked openly as self-employed contractors, were, on the facts, adjudged to be employees. This enabled them to bring unfair dismissal claims when their contracts were terminated.

The Court of Appeal has now said that it was not open to the employers to argue that the claims could not proceed because they were based on illegal contracts.

Previous cases had suggested that if a worker knowingly participates in a contract that defrauds the tax authorities, that contract is illegal and he cannot rely on it to form the basis of a legal claim.

However, in these cases the Court of Appeal says that, in these two cases, the parties had been acting in good faith and had not misrepresented their situation to HMRC. They had just 'wrongly characterised their relationship' but the contracts were not illegal. For a contract to be set aside as illegal, both parties must have misrepresented the situation to HMRC Specifically Court of Appeal says it would have been different if there had been any false representation to HMRC about the work being done or the basis on which payment was made or if services were stated to be provided by a partnership or a company (rather than the individual worker) where this was clearly false.

Points to note:

· While this case gives guidance of a sort, it seems that each case will depend very much on its facts.

· It will be of little consolation to employers that, in one of these cases, the tribunal decided that the claimant was in fact an employee after HMRC had been prepared to accept his status as one of self-employment.

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