Illegal contract, parties innocent, employee or consultant

EAT holds that there must be a deliberate intention to misrepresent an individual's status before it can be found that a contract is illegal.

Mr Connolly was offered employment by Whitestone Solicitors but requested to be treated as self-employed for tax purposes and was paid against invoices that he submitted. He subsequently left and made claims, including unfair dismissal, on the basis that he was an employee.

Public policy dictates that employees cannot sue for unfair dismissal if their employment was based on an illegal contract. Therefore a central issue in this case was whether his contract with the firm was illegal or not.

The ET ruled that the claimant was an employee but then looked into the remuneration arrangement with the respondent. They ruled that it fell within the category of case described by Elias P in Grace v BF Components Ltd 'where the contract was lawful when made but has been illegally performed, and the party seeking the assistance of the court knowingly participated in the illegal performance'. This ruling was made despite assertions by the claimant that he had not intended that the initial arrangement would go on for so long but attempts to clarify his employment status with the respondent had failed. The claimant appealed.

The EAT held that, although it had legitimate concerns about the legality of the contract (especially as both parties to it were solicitors), the contract would only be illegal if one of the parties had tried to conceal the true nature of their relationship from HM Revenue. There was no evidence that Mr Connolly had claimed self-employed status while knowing that he was not entitled to it. The claim was remitted to an employment tribunal to determine whether he had misrepresented his status.

There are tax and national insurance benefits for both parties when an organisation engages an individual on a self-employed basis. But the contract will be illegal (and therefore not enforceable by either party) if they know that the true nature of the relationship means that they are not entitled to those benefits.

Arguably the issue would not have arisen had Mr Connolly been engaged via a personal service company (provided of course that such an engagement complied with the IR35 regime and other relevant rules).

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