Case of the week: Pickard v Lynn Hughes t/a the Tanning and Beauty Kabin

Pickard v Lynn Hughes t/a the Tanning and Beauty Kabin

FACTS

Ms Pickard worked for Tanning and Beauty Kabin from July 2004 until December 2008. She was not given any written contract or statement of terms. She was paid in cash. Ms Pickard brought tribunal proceedings complaining principally of unlawful deduction from wages by failure to pay the national minimum wage, but also failure to provide: written terms and conditions; annual leave under the Working Time Regulations 1998; and adequate written pay statements.

DECISION

The employment judge (sitting alone) dismissed the claim on the basis that it was tainted by illegality. He was not satisfied that Ms Pickard genuinely believed that tax and national insurance were being deducted at source by the employer.

The judge held that Ms Pickard knew, or ought reasonably to have known, that remuneration paid to her should have been subject to deduction of tax and national insurance. The judge also held that Ms Pickard knew that the employer was not paying tax and national insurance to HMRC or at least did not care whether it was or not.

The judge said that Ms Pickard was colluding with the employer in avoiding the payment of tax and national insurance. Both parties were party to a contract being performed in an illegal manner and the contract was unenforceable as a matter of public policy.

Ms Pickard appealed to the EAT, which upheld the appeal. The employment judge had failed to direct himself on the relevant law. The issues were whether or not the contract was indeed being performed illegally and whether or not Ms Pickard voluntarily participated in that illegal performance. The illegal performance in question was the non-payment of tax.

The employment judge was entitled to find that the employer was in breach of an obligation to pay PAYE. However, failure to pay PAYE will constitute unlawful performance only if there is bad faith involved. There was insufficient evidence on which the judge could conclude this. In any event, the question remained whether or not Ms Pickard positively participated in the illegality.

The tribunal’s reasons contained no examination of Ms Pickard’s knowledge or state of mind about the arrangements under which she was paid. The claim was remitted to a different tribunal for re-hearing.

IMPLICATIONS

Employees working under illegal contracts may be prevented from relying on contractual and statutory employment rights. There are two tests to determine whether or not an employer can use the defence of illegality in response to an employee’s claim:

• For discrimination claims (and claims based on other statutory torts), the tribunal is required to consider whether or not the employee’s claim arises out of, or is so clearly connected or inextricably bound up or linked with, the illegal conduct of the employee that the tribunal could not permit them to recover compensation without appearing to condone that conduct.
• For claims arising out of the contract of employment (such as wrongful or unfair dismissal), unless the contract was entered into for an illegal purpose or is prohibited by statute, the tribunal needs to establish that there was illegal performance of the contract and then go on to consider whether or not the employee knew of the facts that made performance illegal and actively participated in the illegal activity.
• The determination of illegality will usually be fact-sensitive and as such it will be rare for the EAT to interfere. However, this is an example of a case where there was no evidence on which the tribunal could find that the employee participated in the illegal activity.

Nick Jew, partner, DLA Piper