Appeal No. EAT/0250/01

EMPLOYMENT APPEAL TRIBUNAL
58 VICTORIA EMBANKMENT, LONDON EC4Y 0DS

	                   At the Tribunal
	       On 21 & 22 May 2002 
Judgment delivered on 24 May 2002

Before
HIS HONOUR JUDGE PETER CLARK
MR D A C LAMBERT
MR R N STRAKER

MR A G SOTERIOU	APPELLANT

(1) ULTRACHEM (2) SOLVO LTD (3) ULTRACOLOUR LTD	RESPONDENTS

Transcript of Proceedings

JUDGMENT

Revised

	APPEARANCES

For the Appellant	THE APPELLANT IN PERSON	
For the Respondents	MS J EADY
(of Counsel)
Instructed by:
Messrs Lawrence Graham 
Solicitors
190 Strand
London WC2R 1JN	

JUDGE PETER CLARK

1.	This is an appeal by Mr Soteriou, the Applicant before an Employment Tribunal sitting at London (Central) under the chairmanship of Mr M S Rabin on 27-28 November 2000.  Following deliberations in private on 18 December the Employment Tribunal promulgated its decision with Extended Reasons on 9 January 2001, dismissing his complaint of unfair dismissal brought against the Respondent Companies on the grounds of illegality.

The Issues
2	By an Originating Application presented on 13 April 2000 the Appellant contended that he had been employed by one or more of the Respondent companies as their accountant from August 1987 until his dismissal on 17 January 2000.  He complained that his dismissal was statutorily unfair.  He expressly excluded any claim for breach of contract.  Such a claim has since been brought in the Queens Bench Division of the High Court.  Those proceedings have been stayed pending the outcome of these tribunal proceedings.

3.	By their Notice of Appearance the Respondents took two preliminary points going to the Employment Tribunal’s jurisdiction to entertain the Appellant’s complaint of unfair dismissal:

(1)	that the Appellant was at all times engaged by one or more of the Respondents under a contract for services; he was never their employee, as defined in Section 230(1) Employment Rights Act 1996 during the relevant period, August 1987 to 17 January 2000, (the employee point) 
alternatively
(2)	if he was an employee the Appellant’s contract of employment was tainted by illegality in that he was a knowing and consenting party to arrangements which were devised to avoid the deduction and payment of income tax and National Insurance Contributions (NIC) as an employee under the PAYE Scheme and therefore to a fraud on the Inland Revenue and the Contributions Agency (the illegality point).

4.	It was these 2 preliminary issues only which came before Mr Rabin’s Employment Tribunal.  At paragraph 5 of their reasons the Employment Tribunal record that the Respondents offered no substantive defence to the claim of unfair dismissal, subject to the jurisdictional issues.  Ms Eady does not seek to resile from that concession before us.

The facts
5.	It is a frequent source of puzzlement for first instance courts and tribunals that the judgment on appeal appears to bear little or no relation to the way in which the case was run below.  More importantly, the Court of Appeal has made it abundantly clear that, on appeal to the Employment Appeal Tribunal, parties will not be permitted to take new points not argued below, save in exceptional circumstances.  See Jones v Burdett Coults School [1998] IRLR 521; Glennie v Independent Magazines (UK) Ltd [1999] IRLR 719.

6.	We must therefore be careful to discern precisely how the respective cases were put below.  That task is eased in the present case by the fact that below the Appellant was represented by Counsel, Mr Dale Martin and the Respondents by Ms Jennifer Eady.  Both put before the Employment Tribunal detailed written closing submissions.  We have before us those submissions.  It is therefore possible to see precisely how the respective cases were put, both as to the facts and the law.

7.	We turn then to the Employment Tribunal’s findings of fact, noting where the facts were in dispute and how those disputes resolved by the Employment Tribunal.  It is axiomatic that appeals to the Employment Appeal Tribunal are on points of law only, not fact.  Employment Tribunals Act 1996.  Section 21(1).

8.	In Summer 1986 the Appellant was working as an independent book-keeper/accounts clerk for a firm of accountants, McCormack & Associates.  In that capacity he did some work for the 3rd Respondent, then the leading company in the group of companies comprising the Respondents.  Mr Tony Brinton was and remained the principal shareholder in that company.  He was impressed by the Appellant’s work and offered to engage his services as an accountant.

9.	There was a dispute as to the basis on which the Appellant was then engaged; he asserting that Mr Brinton insisted that he should render his services on a self-employed basis so as to save the Respondents employers’ NIC; the latter contending that it was the Appellant who insisted on rendering his services on a self-employed basis so that he could retain his self-employed status.  Mr Brinton agreed, for the benefit of both of them.  The Employment Tribunal accepted Mr Brinton’s version of events.

10.	From the outset the Appellant rendered invoices monthly in arrears.  It appears that he worked solely for Mr Brinton’s companies.  His remuneration rose from £18,000 pa to £100,000 pa at the date of termination.  As Mr Soteriou put it, “Prime Minister’s salary”.

11.	The Appellant worked from the Respondent’s head office in Whetstone, North London.  The Employment Tribunal accepted his account of his duties which included, so far as is material, VAT returns, PAYE related work such as P45s for employees joining and leaving, P60s, P35s and P11Ds, attending salary review meetings and employment related issues such as notices to and dismissal of employees.

12.	From 1994 Mr Brinton spent increasing periods of time at his holiday home in Florida.  The Appellant was an important part of the management team and kept Mr Brinton regularly informed of developments by fax and telephone.

13.	From 1988 the Appellant was registered for VAT and invoiced the Respondents in the name of his business style, AGS Services, the Appellant’s initials.  Over the years the Appellant recovered VAT which he expended on personal expenses at his home, including garage doors, an alarm system and building work.

14.	The authorities, the Inland Revenue, Department of Social Security and Customs & Excise began to express concern about the true status of various people working for the Respondents.  The Employment Tribunal found that the Appellant was well aware of the difference between employee and self-employed status and the potential financial consequences to the Respondents of misdescribing their workers.
 
15.	In 1996 Mr Brinton entered into negotiations with a view to selling his business interests.  At that time discussions took place between the Appellant and Mr Brinton with a view to formally converting his status from self-employed to employee.  The Appellant prepared a draft contract of employment which was put to Mr Brinton.  The latter indicated disagreement with some of the terms proposed.  In the event no written contract was agreed between them.  The proposed sale of the business also broke down.

16.	There was some discussion about the Respondents contributing £40,000 to the cost of a Mercedes motor car (£60,000) for the use of the Appellant.  No final agreement was reached, so the Employment Tribunal found, not least because in November 1998 the Contributions Agency commenced an investigation into the employment status of the Appellant.  He did not want the Respondents to purchase a car for him whilst that enquiry was continuing, in the following circumstances.

17.	The consequence of the Contributions Agency concluding that the Appellant was an employee and not self-employed would be financially serious for both the Respondents and the Appellant, the Employment Tribunal found.  The Respondents would face a substantial demand for employers’ National Insurance Contributions, tax penalties and interest.  For the Appellant, there were potential additional National Insurance Contributions and possibly an enquiry by Customs & Excise as to whether he had been properly registered for VAT, against which he had set domestic expenditure, with the risk of swingeing penalties.

18.	The Appellant suggested that Mr Brinton sought advice from a specialist firm of accountants.

19.	A meeting was arranged between the Appellant, Mr Brinton and Mr Everett of that firm.

20.	It was the Appellant’s evidence before the Employment Tribunal that he had informed Mr Everett at that meeting, held on 27 November 1998, that he was and always had been an employee of the Respondents, with his own office at their Head Quarters; he received sick pay and holiday pay; he worked exclusively for the Respondents.  Despite giving him that information, Mr Everett advised the Appellant what to say when interviewed by a Contributions Agency representative in order to maintain his self employed status.  Mr Everett vehemently denied that allegation in evidence.  The Employment Tribunal accepted that denial.

21.	The Appellant further asserted that he was forced by Mr Brinton to adopt and maintain his self-employed status.  Having heard Mr Brinton, the Employment Tribunal rejected that assertion also.

22.	In December 1998 the Appellant attended an interview with Mrs Sompal of the Department of Social Security.  Based on what he told her, Mrs Sompal prepared a statement for the Appellant which he signed.  As he later admitted in evidence to the Employment Tribunal that statement contained a number of factual assertions which were at variance with the true position; for example he told Mrs Sompal that he did not have an office at the company’s premises; he did not have set hours of work; he did not receive sick pay and holiday pay; he did not have a company business card; he did not have a company parking space; he could sub-contract his work to others and could send along a substitute; he had no authority to sign company cheques.  None of this was true; all these features point away from a contract of service.

23.	As a result of this false account given by the Appellant the Department of Social Security accepted that the Appellant was self-employed from 1998 onwards.  It was not until October 2000, the Appellant tells us, that he withdrew his false statement to the Department of Social Security.

24.	Thereafter the relationship between the Appellant and Mr Brinton broke down, culminating in a parting of the ways on 17 January 2000 amounting to a dismissal.

25.	The Employment Tribunal was told of negotiations between the parties to resolve any further dispute between them.  Mr Brinton offered a lump sum of £100,000 less tax.  Mr Soteriou asked for £400,000 after tax.  No compromise proved possible and this litigation, and that in the High Court, ensued.

Illegality
26.	It has long been a principle of the English common law, as a matter of public policy, that the courts will not enforce an otherwise valid contract which is tainted with illegality.  The principle is easy to state but not always so easy to apply in practice, that is, on the facts of a given case.  The flexibility of the public policy doctrine has given rise to two opposing schools of thought; it is “a treacherous ground for legal decision”, in the opinion of Lord Davey.  Janson v Driefontein Consolidiated Mines Ltd [1902] AC 484, 500; whereas in the view of Professor Winfield the “variability of public policy is a stone in the edifice of the doctrine, and not a missile to be flung at it” (1928-29) 42 Havard Law Review 76, 94.  In the days before the advent of the Mercedes Benz motor car it led to the “unruly horse” metaphor, see Burrough J in Richardson v Mellish [1824] 2 Bing, 229, 252, picked up by Lord Denning MR in Enderby Town Football Club Ltd v The Football Association Ltd [1971] Ch 591, 606.

27.	More recently it has been successfully invoked to defeat claims of unfair dismissal in the Employment Tribunal.  The cases are helpfully reviewed by Peter Gibson LJ in Hall v Woolston Hall Leisure Ltd [2000] IRLR 578, paragraphs 32-36.  The position is summarised by his Lordship at paragraph 38 thus:

“In cases where the contract of employment is neither entered into for an illegal purpose nor prohibited by statute, the illegal performance of the contract will not render the contract unenforceable unless in addition to knowledge of the facts which make the performance illegal the employee actively participate in the illegal performance.  It is a question of fact in each case whether there has been a sufficient degree of participation by the employee.  And as Coral Leisure Group [1981] IRLR 204 shows, even if the employee has in the course of his employment done illegal acts he may nevertheless be able subsequently to rely on his contract of employment to enforce his statutory rights.  The Salvesen [1994] IRLR 52 case on its facts was not a case of mere knowledge of the facts constituting illegality: the employee’s involvement was much greater.  The Hewcastle [1991] IRLR 473 case shows some of the factors which may be relevant to determine whether the statutory employment rights conferred on an employee are not to be defeated by illegality in the performance of the contract of employment.”

28.	Hewcastle Catering Ltd v Ahmed [1991] IRLR 473 (CA) is an example of a case on its facts where public policy did not require the employees’ claims to be disallowed on the grounds of illegality.  There the Respondent devised a fraudulent scheme to avoid VAT at his club which required the Applicant waiters to implement the scheme.  After assisting Customs & Excise in an investigation resulting in the club owner’s criminal prosecution the waiters were dismissed.  On their complaints of unfair dismissal a defence of illegality was rejected by the Employment Tribunal, rightly so that the Court of Appeal held.

29.	On the other side of the line are cases such as Corby v Morrison [1980] ICR 564, and Tomlinson v Dick Evans U Drive Ltd [1978] ICR 639, where the parties to the contract knowingly agreed to a scheme for part payment of wages which evaded income tax.  That hard-line approach, by the Employment Appeal Tribunal in both cases, follows the Court of Appeal approach in the older case of Miller v Karlinski [1945] 62 TLR 85.

30.	Hall was referred to the Court of Appeal on the question as to whether different considerations apply to cases of sex discrimination, with a Community Law element.  We are not concerned with that issue, now resolved by the Court of Appeal in Hall, in the present case.  However, since Hall was not referred to by Counsel or by the Employment Tribunal in this case, we shall be guided by the summary of the law in respect of unfair dismissal as formulated by Peter Gibson LJ and set out above.

Employment Tribunal Decision
31.	As to the employee point, we see from the closing submissions of Counsel that (a) the Appellant maintained that throughout the relevant period, 1987 to 2000, he was an employee of the Respondents and (b) with equal conviction the Respondent contended, as their primary case, that he had always been self-employed.

32.	The Employment Tribunal found a third way.  The Appellant was self-employed until 1996, but from some time during that year that status changed and he then became an employee.  There is no appeal or cross-appeal against that finding.

33.	On the illegality point the Employment Tribunal concluded, as a matter of fact, that the Appellant was a skilled professional adviser who was well aware of the legal and taxation implications of his self-employed status.  Mr Brinton, whilst a shrewd businessman, was less well versed in the finer points of the difference between employed and self-employed status.  Pausing there, we interpose that on the Employment Tribunal’s findings this is an unusual case; the employee was more aware of the minutiae of the distinction than the effective employer.  Having rejected the Appellant’s case that he was put up to mislead the Department of Social Security by Mr Everett or pressured by Mr Brinton to do so, the Employment Tribunal concluded that it was the Appellant who was the prime mover in ensuring that his self-employed status was preserved following the Contributions Agency investigation; thus he  made fraudulent statements to that authority for his own benefit.  The main blame for that state of affairs lay with him and not Mr Brinton.  In these circumstances the Employment Tribunal accepted the Respondent’s submission that the Appellant, having knowingly committed a fraud under a contract in the way which he acknowledged, could not now come to the Employment Tribunal to pursue a legal claim on that contract.  The application was dismissed.

The Appeal
34.	The Appellant has, throughout these appeal proceedings, represented himself.  We make every allowance for the fact that he is not a lawyer, but acknowledge that he is an accountant who has, in his words, picked up some of the relevant law in the course of these proceedings.

35.	Having settled his own grounds of appeal in the form of a witness statement served in support of his Notice of Appeal dated 14 February 2001, the appeal was listed for ex parte Preliminary Hearing before a division presided over by Lindsay P sitting on 1 August 2001.  For the purpose of that Preliminary Hearing the Appellant prepared a written Skeleton Argument which is before us.

36.	As appears from the judgment of the President delivered on that day the Employment Appeal Tribunal dismissed all grounds of appeal save one, the “difficult area” of illegality.  At paragraph 7 of his judgment the President raised a series of question which required investigation at a full appeal hearing.  He said this:
“7	The Soteriou case has some features which complicated it.  He was, held the Employment Tribunal, originally truly self-employed.  It was not possible to say precisely when he began to be truly employed; there was no finding as to when he believed, if ever he did, that he was employed and no longer self-employed, although he knew that there was an even chance that it was the case that he was employed (paragraph 29).  It would seem that he continued to account to the Revenue and to the Customs & Excise as if he was self-employed.  It would thus perhaps be arguable that although he had mistaken for a period, he had not actually been fraudulent as he had continued to account to the Inland Revenue and Customs & Excise,or any other Government body that would be relevant, on the basis that had previously been the case, a basis which was not held by the Inland Revenue or the Customs & Excise not to be the case and which he was not held by the Tribunal to have known not to be the case.  Is it illegality, on finding that the basis on which you have accounted for tax and National Insurance contributions and in any other relevant way was false unless you knew it was false?  Is it illegality on finding that the basis is false and that another basis better suits you, then to assert that later better basis?  Or do the Tribunal’s findings that he had lied negate any argument that he did not know that he was accounting falsely?”
At paragraph 8 he added:
“8.	It is not an easy area and the cases draw really quite fine distinctions between one case and another.  We direct that the case is to go to a full hearing only on the question of whether the Employment Tribunal erred in law in its penultimate sentence, namely, “that having knowingly committed a fraud under a contract, in the way that Mr Soteriou has acknowledged, he cannot now come to this Tribunal to pursue a legal claim based on that contract.”

37.	Before leaving that judgment we should add this.  The President directed that the full appeal hearing should be presided over by a High Court Judge.

38.	Mr Soteriou has been, understandably, anxious to have his appeal heard as soon as possible.  It was originally listed for hearing on 27-28 May 2002.  It then transpired that no High Court Judge would be available on those dates.  Mr Soteriou learnt of this when he telephoned the listing office on 20 March.  He told us that he was distressed to learn that he may have to wait until October before being heard.

39.	Consequently, on 25 March, the Registrar wrote to the parties informing them that the case would be heard by me on 21-22 May.  No objection was then raised.  At the hearing on 21 May I elicited from Mr Soteriou that he had no objection to my hearing the case.  Neither did Ms Eady.

40.	Against the Employment Appeal Tribunal decision to dismiss all other grounds of appeal the Appellant sought permission to appeal to the Court of Appeal.  That application came before Sedley LJ on 12 December 2001.  Permission was refused.  Thus our task is limited to considering whether the Appellant has established that the Employment Tribunal erred in law in the way formulated by the President at the Preliminary Hearing.

41.	During the course of the hearing before us the Appellant made application to adduce new evidence on appeal.  For the reasons then given in an Interlocutory judgment, separately transcribed, we refused that application.

42.	Mr Soteriou’s principal submission before us in oral argument is that the Employment Tribunal was wrong to find that he was a willing participant in the lies which he told to the Contributions Agency.  He complains that he was not permitted to put his full case to the Employment Tribunal.  That case included, in particular, allegations about other illegalities and unlawful activities which he alleges were perpetrated by Mr Brinton as showing that he, the Appellant, was powerless to persuade Mr Brinton that he should go on the payroll.  As appears from our interlocutory judgment the new evidence which he sought to adduce on appeal was said to support those allegations.

43.	That was a point which was before the Employment Appeal Tribunal at the Preliminary Hearing and rejected; permission to appeal against that ruling was in turn refused by Sedley LJ.

44.	In these circumstances, as we endeavoured to explain to Mr Soteriou, we must approach this appeal on the basis of the facts as found by the Employment Tribunal on the evidence before them.

45.	On those facts we cannot accept Mr Soteriou’s submission that he is in a similar position to the Applicants in Hewcastle.  In our view their positions could not be more different.  In Hewcastle the Applicants, waiters, fell in with the employer’s fraudulent scheme without benefit to themselves.  They then assisted the authorities in their investigation, to the extent of giving evidence for the prosecution against their employer.  They were dismissed for their trouble.  In the present case, on the facts, the Appellant knowingly and actively participated in what was acknowledged to be a deception on the Contributions Agency.  He told a string of lies, not because he had been advised to do so by Mr Everett or pressurised into doing so by Mr Brinton, but because he wished, falsely, to maintain his self-employed status for his own purposes.  The contrast could hardly be more stark, in Hewcastle the employees, having themselves derived no benefit from the fraud, then co-operated with the authorities; Mr Soteriou, a professional accountant, deliberately and voluntarily, on the Employment Tribunal’s findings, actively misled the authorities for his own benefit.

46.	In Massey v Crown Life [1978] ICR 590, 594 E-F Lord Denning MR said this:
“The law, as I see it, is this: if the true relationship of the parties is that of master and servant under a contract of service, the parties cannot alter the truth of that relationship by putting a different label upon it.  If they should put a different label upon it and use it as a dishonest device to deceive the revenue, I should have thought it was illegal and could not be enforced by either party and they could not get any advantage out of it – at any rate not in any case where they had to rely upon it as the basis of a claim: see [1936] Alexander v Rayson 1 K B 169.  An arrangement between two parties to put forward a dishonest description of their relationship so as to deceive the revenue would clearly be illegal and unenforceable.”

47.	That, it seemed to the Employment Tribunal as it does to us, is this case.

48.	It is, of course, otherwise where the parties genuinely but mistakenly put the wrong label on their relationship.  See eg Young and Woods Ltd v West [1980] IRLR 201.

49.	That, we think, meets the questions posed by the President at the Preliminary Hearing.  Not only do the Employment Tribunal’s findings negate any argument that the Appellant did not know he was acting falsely; they also clearly show that he was actively participating in the illegality for his own benefit as well as that of the Respondents.  The test formulated by Peter Gibson LJ (Hall, Paragraph 38) is met in this case.

50.	We should lastly deal with this point made by Mr Soteriou, that it cannot be right that the Respondents, in effect Mr Brinton, can defeat the Appellant’s otherwise good claim for unfair dismissal when he, Brinton, was a party to the deception on the authorities.  The answer to that lies in the nature of the public policy doctrine.  It is not designed to advantage one party or the other to an illegal contract, although that may be its consequence.  The principle is that the Court will not assist either party to bring proceedings based, as in the case of unfair dismissal, on the illegal contract.

Conclusion
51.	Although the law in this area can be difficult, much will depend on the facts.  Having heard Mr Soteriou it is clear to us that this is, in truth an appeal on fact.  There is no error of law made out.  The appeal fails and is dismissed.