Illegal contracts are no defence in bias claims

Illegal employment contracts are no protection when staff claim sex bias, the Court of Appeal has ruled

Can an employee sue for unfair dismissal or discrimination if the contract they are employed under is tainted with illegality, for instance because the employer has been defrauding the Inland Revenue? This was the question for the Court of Appeal in Hall v Woolston Leisure (New Law Digest, 30 May 2000).

Hall was dismissed ostensibly on the grounds of capability and redundancy, but an employment tribunal held that the real reason for her dismissal was that she was pregnant. It therefore held that she had suffered unlawful sex discrimination contrary to the Sex Discrimination Act 1975.

But it became apparent that while she was employed, her employer had not been deducting income tax from a part of Hall’s income, thus defrauding the Inland Revenue. This, the tribunal decided, made the contract of employment illegal, which meant that Hall could derive no rights from it – including any right to compensation under the SDA.

The tribunal therefore awarded her no compensation for loss of earnings, despite the finding that she had clearly suffered discrimination. The decision was upheld by the EAT.

The thinking behind the decision of the employment tribunal and the EAT is that once a contract is tainted with illegality, a court or tribunal is powerless to enforce it. But should the illegality of a contract affect the enforcement of statutory rights?

The argument goes that in order to enjoy these statutory rights, you have to be employed under a contract. So if that contract is void for illegality you have no rights under the statute. On this basis an employee will be unable to bring a claim for discrimination or unfair dismissal if his or her employer has been acting illegally – by, for instance, failing to make proper tax and National Insurance deductions, even if the employee is unaware that any fraud has been committed.

This can have be extremely damaging for staff. Employers who defraud the Revenue tend also to be prepared to treat employees unfairly. To leave such individuals without statutory rights seems highly suspect.

The Court of Appeal in the Paul case has provided some welcome clarity – at least in the area of sex discrimination.

The court overturned the decisions of the employment tribunal and the EAT. It upheld the 1996 decision in Leighton v Michael, 1996, IRLR 67, in which the EAT held that the doctrine of illegality has no effect on the ability of an individual to bring a sex discrimination claim.

One of the judges said it would be “deplorable” if Paul were unable to enforce her statutory claim, particularly as she had not actively participated in the illegal conduct of her employer nor derived any benefit from it.

The court went further and stated that even if the contract were unenforceable on the grounds of illegality, Hall would still be entitled to recover compensation under the SDA, as the Equal Treatment Directive (on which the SDA is based) makes no mention of the need for a contract.

It now seems clear, therefore, that an employer will not be able to rely on its own illegal performance of an employment contract to defeat a sex discrimination claim. But the position remains unclear in relation to unfair dismissal and under the other discrimination legislation, and such claims by employees may be blocked, particularly if the employee has participated in the illegality.

But this imbalance may be redressed in favour of the employee. The employer will be unable to enforce notice periods, garden leave, confidentiality clauses or restrictive covenants if the contract is illegal.

Alastair Brunker is a solicitor specialising in employment law at Shell International

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