THE INDUSTRIAL TRIBUNALS

CASE REF:	  1333/13
1334/13

CLAIMANTS:		1. Darrin Gerard Hall
				2. Aaron George McLaughlin

RESPONDENTS:		1. Printyard Ltd
2. Department for Employment and Learning

DECISION 

(A)	In the Hall case, our decisions are as follows: 

(1)	Printyard Ltd (“Printyard”) is liable to make a redundancy payment to the claimant.  

(2)	The respondent Department (“the Department”) ought to make a payment to the claimant in respect of notice pay.

(3)	The parties should now seek to agree the amounts which are due.  If agreement is not reached, a remedies hearing will be arranged.

(B)	In the McLaughlin case, our decisions are as follows:

	(1)	Printyard is liable make a redundancy payment to the claimant.  

	(2)	The Department ought to make a payment to the claimant in respect of notice pay.

	(3)	The parties should now seek to agree the amounts which are due pursuant to this decision.  If agreement on amounts is not reached, a further remedies hearing will be held in these proceedings.

Constitution of Tribunal:

Employment Judge:	Employment Judge Buggy

Members:	Mr J Kinnear
	Ms B Heaney	

Appearances:

The claimants were represented by Mr Thomas McKillop.

Printyard was not represented.

The Department was represented by Mr Peter Curran.  

REASONS

1.	According to the claimant Darrin Hall (“Mr Hall”), he was employed by Phoenix Printing and Stationary Ltd (“Phoenix”) from March 2004 until that company ceased trading in 2010 and he was employed immediately afterwards by Printyard Ltd (“Printyard”), and he was continuously employed thereafter by Printyard until 26 April 2013, when he was dismissed, by reason of redundancy, without notice.

2.	The claimant, Mr McLaughlin, asserts that he was employed by Phoenix from 1992, until that company ceased to trade, and that immediately thereafter he was continuously employed by Printyard until Printyard dismissed him, without notice, by reason of redundancy, on 26 April 2013.

3.	Mr Hall says that Printyard owes him sums in respect of redundancy and in respect of notice pay, but never paid those debts.

4.	Mr McLaughlin says that Printyard owes him sums in respect of notice pay and redundancy pay, but never paid those debts.

The claims and the appeals

5.	Each of these two claimants made applications to the Redundancy Payments Service (“the RPS”), in its capacity as the statutory guarantor in respect of certain employment debts, in respect of the debts which they say are owed to them by Printyard.  Both of those applications were unsuccessful, in respect of notice pay and in respect of redundancy pay.

6.	In these proceedings, Mr Hall makes claims against Printyard.  In these proceedings, he also, in effect, appeals against the outcomes of the applications which he made to the RPS in respect of notice pay and redundancy pay.

7.	In these proceedings, Mr McLaughlin makes claims against Printyard.  In these proceedings, he also, in effect, appeals against the outcomes of the applications which he made to the RPS in respect of notice pay and redundancy pay.

8.	Printyard has been the subject of a compulsory winding-up.  Accordingly, in each case, the proceedings against Printyard cannot be pursued unless and until the leave of the High Court, to do so, has been obtained.  In each case, that leave has not been obtained.  Therefore, at present, it is not possible for the claims against Printyard to be adjudicated upon.

9.	Accordingly, in each instance, a main hearing has been held only in respect of the relevant claimant’s appeals against the relevant RPS decisions.  This is our Decision in respect of those appeals.

The potential issues

10.	In each case, the RPS always accepted that the relevant claimant had been employed by Phoenix throughout the period during which he claimed to have been employed by that firm.  

11.	However, on the basis of the information then available to it, the Service concluded that it was not satisfied that the relevant claimant had been employed by Printyard throughout the 2010/11 tax year and throughout the 2011/12 tax year.  (Obviously, if there was such a break in a relevant claimant’s period of employment, that would have major implications for his entitlement to any redundancy payment, and for the extent of any notice pay entitlement).

12.	Secondly, in each of the two relevant cases, on the basis of the information and evidence available to it at the time it made the relevant decisions, the RPS was not satisfied that the claimant’s gross pay was as much as he said it was.  

13.	Thirdly, during the course of this hearing, it became clear that there was an issue in each of these cases as to whether this tribunal is deprived of jurisdiction because the contract had, allegedly, been performed illegally (in light of failures to deduct tax, and to pay over that tax, to HMRC).

14.	In each case, the HMRC contributions records indicated that the relevant claimant had been employed by Phoenix throughout the period during which he claimed to be employed by that firm.  In each case, the HMRC record also showed that he had been employed by Printyard during the 2012/2013 tax year.  However, in each case, the HMRC records give no indication that the relevant claimant was employed by Printyard during any period during the 2010/2011 tax year or during any period during the course of 2011/2012 tax year.  Furthermore, there was no documentary evidence confirming that the relevant claimant was entitled to the amount of weekly gross pay, or indeed the amount of weekly net pay, which he said were the amounts due to him from Printyard.  

15.	Against that background, and in those circumstances, the Department was acting entirely properly, at the time it made its decisions in relation to the applications of these claimants, in not being willing to accept that each claimant had continuity of employment throughout the 2010/2011 and 2011/2012 tax years, and in declining to accept that each relevant claimant was entitled to the weekly amounts of pay which he said he had been entitled to receive.

16.	However, in light of evidence which was presented for the first time during the course of the hearing of these appeals, the Department ultimately accepted, and was right to ultimately accept:

	(1)	that each claimant was continuously employed by Printyard throughout the 2010/2011 tax year and throughout the 2011/2012 tax year; and 

	(2)	that, during the relevant period, the claimants were receiving wages payments of £210 per week (in the case of Mr Hall) and £300 per week (in the case of Mr McLaughlin).

The remaining issues

17.	Accordingly, in each of these two cases, we have ultimately been left only with the following issues to resolve:

	(1)	Is this tribunal deprived of jurisdiction because of contractual illegality?

	(2)	If not: 

(a)	During the last twelve weeks prior to his dismissal.  Was Mr Hall paid £210 gross per week, or was that his net pay?  

(b)	During the same period, was Mr McLaughlin paid £300 per week gross, or was that his net pay?

The evidence

18.	We received sworn oral testimony from the claimants and from Mrs Claire Donnelly (“Mrs Donnelly”).

19.	We also saw documents which were contained in a bundle which had been prepared by the Service.  (We told the parties that, for evidential purposes, we would have regard to a document within the bundle only if one or more of the parties had drawn our attention to it).  The parties also provided us with some miscellaneous documents.

The facts

20.	In the following sub-paragraphs, we set out findings of fact which are relevant to the issues which we have determined.  (To minimise avoidable duplication, and for ease of reference, we have also set out some additional findings of fact elsewhere in this Decision).  

	(1)	The company which we refer to as “Phoenix” in this Decision was a printing company which operated in West Belfast.  One of the Directors of that company was Mrs Donnelly, who was a witness in these proceedings.  Phoenix was run by Mrs Donnelly’s husband who, sadly, died in 2008.

	(2)	Phoenix ceased to trade in 2010, because no rent had been paid on its premises in Townsend Street, and the company was evicted from its premises there.  Phoenix was dissolved in October 2010, was subsequently restored to the Register of Companies, and was the subject of a winding up order in November 2010.

	(3)	Immediately after Phoenix stopped trading, the company we refer to as “Printyard” began trading.  Two Directors of that company were Mr Gary Donnelly and Mr Stephen Donnelly, Mrs Donnelly’s sons.  Printyard had essentially the same customer base as Phoenix had had.  Like Phoenix, Printyard operated out of West Belfast premises.  It carried out much the same work as Phoenix, and in exactly the same sector of economic activity.  Many of the staff who had been employed by Phoenix were immediately employed by Printyard, without an intervening gap in employment.  Printyard used substantial printing equipment, which had previously been an asset of Phoenix.

	(4)	At the time when Phoenix ceased to operate, each of these two claimants was employed in Phoenix.  We have no doubt that, at that time, each claimant’s contract of employment was the subject of a “TUPE” transfer, whereby continuity of employment (between the employment previously with Phoenix, and the employment now with Printyard) was preserved.

	(5)	During most of their period of employment with Printyard, that company was not making any payments to HMRC in respect of either of these two claimants’ wages.  That was a blatant breach of the income tax legislation.  Mrs Donnelly, who had dealt with much of the book-keeping for Printyard, was unable to give any satisfactory “innocent” explanation for the failure to pay over deductions.  Having had regard to all the surrounding circumstances, we have no doubt that the failure to pay over deductions was a deliberate decision on the part of Printyard, and that it did not occur as result of some inadvertent or innocent error.

	(6)	Each of the claimants told us that he had been told by Gary Donnelly that Printyard would be responsible for paying any tax or national insurance contributions which had to be made from, or in respect of, his salary.  Gary Donnelly gave no evidence to this tribunal.  He was not called as a witness by the claimants.  Mrs Claire Donnelly gave evidence.  She said that she was unaware of any arrangement between Gary Donnelly and the claimants to the effect contended for by the claimants.  The fact that Mrs Donnelly did not know of such an arrangement is not, in itself, the last word on the matter.  It is possible that such an arrangement might have been made by Gary Donnelly with the claimants, without the knowledge of Mrs Donnelly.  However, having carefully considered the evidence given by the claimants in this connection, we rejected that evidence.  We did so, having regard to the demeanour of each witness, and the manner in which he gave evidence, when the claimants were giving evidence on this matter.  We rejected it also because of the implausibility of this contention.  (In particular, we note that, according to each claimant, Gary Donnelly and himself never agreed, or identified, what his gross salary would be.  Instead, according to their story, the claimants simply agreed that they would receive net pay of a specified amount, with Printyard being responsible for payment of all or any tax and employee’s national insurance contributions).

	(7)	Mr McLaughlin told us that he was never aware that the Phoenix business had gone into financial difficulties.  We are sure that he was lying about that.  It seems extremely unlikely that “the business” changed premises, in circumstances in which Phoenix was being evicted, or was about to be evicted, by its landlord, on account of non-payment of rent, without Mr McLaughlin becoming aware of the fact that Phoenix was in financial difficulties.  

	(8)	According to Mr Hall, he was getting only £150 from Phoenix, at the time Phoenix ceased to operate, but he was given £210 per week after he started working for Printyard.  

	(9)	According to Mr McLaughlin, he was paid only £175 per week for full-time work while employed by Phoenix, but he got £250 initially while working for Printyard, and this amount went up to £300 just before Christmas 2011. 

	(10)	We have no doubt that each of these claimants, despite their protestations to the contrary during the course of their evidence, knew full well, at all material times, that their wages were not being subjected to deductions.  Each of these two claimants told us that he did not know that Printyard was not making the proper deductions from his salary in respect of PAYE.  We regard that as untruthful testimony.  The claimants knew that the previous business associated with the Donnelly family (Phoenix) had got into financial difficulties.  The claimants knew that they were being paid in cash.  The claimants knew that they were getting no P60s.

	(11)	The claimants were employed, both by Phoenix and by Printyard, as printers. 

	(12)	We are satisfied that the claimants were employed by Printyard on a continuous basis, from the time that firm started operations, and Phoenix ceased to operate; that they were employed by Printyard throughout the remainder of the 2010/11 tax year; and that they were continuously employed by Printyard throughout the whole of the 2011/12 tax year.  In arriving at those conclusions, we have taken account of the evidence of Mrs Donnelly, who told us that she had often been on Printyard’s premises during 2010/11 and 2011/12, and that, during those visits, she often saw these claimants working for Printyard.  In that connection, we also took account of an advertising feature in the Andersonstown News in October 2012, which has a photograph which indicates that these two claimants were part of the Printyard team at that time.

The law and our conclusions

21.	In each of these two cases, we are satisfied, on the balance of probabilities, that the relevant claimant was well aware, at the times when the relevant deductions should have been made, that Printyard was not making deductions from his pay, as required by law under the PAYE system.  

22.	In each instance, we have arrived at that conclusion mainly on the basis of the following.  First, we paid regard to the demeanour and manner of giving evidence of the relevant claimant in relation to this issue.  Secondly, we noted that, at all relevant times, the relevant claimant knew that he was being paid in cash and knew that he was not receiving any P60s.

23.	The implication of our conclusions in relation to the question of knowledge is that each relevant claimant lied to us while giving evidence.

24.	In situations in which an employee knows that his employer is not deducting the proper amount of tax from his wages, the employee is nevertheless entitled to pursue claims against the employer, in respect of notice pay or redundancy pay, unless the relevant contract of employment is vitiated by reason of illegality.

25.	In the context of employment law, there are three types of contractual illegality.  In the specific context of PAYE under-deductions, only one type of illegality, illegality as to performance, is relevant.

26.	It is now clear law that illegality by way of performance will not prevent an employee from recovering money pursuant to the relevant contract of employment, even if he contemporaneously knew of the under-deductions of PAYE income tax, unless he participated in that illegality.

27.	In situations like the situation in this case, an employee “participates”, in the context of PAYE under-deductions, only if one of two situations exists:

(1)	The employee is a party to some misrepresentation, of the true facts, to some third party.

	(2)	The employee is the instigator, or a co-instigator, of the under-deduction arrangements.

	(See Pickard v Hughes, UKEAT/0185/10/LA, 28 January 2011, especially at paragraph 13 of the judgment).

28.	Where does the onus of proof lie?  It lies with the party who asserts that the contract of employment has been vitiated as the result of illegality by way of performance: (See Colen v Cebrian (UK) Ltd [2003] EWCA Civ 1676, at paragraph 19 of the judgment).

29.	Volume I of “Chitty on Contracts”, Thirty-First Edition, at paragraphs 16-207 and 
16-208, discusses “Pleading and Practice” in the context of contractual illegality issues.

30.	According to paragraphs 16-207, the position is as follows.  The party alleging the illegality of the contract bears the legal burden of proving that contention.  If the contract is reasonably susceptible of two modes of performance, one lawful and the other not lawful, the legal burden of proving the illegality of performance will be undischarged.

31.	The main relevant points in paragraph 16-209 can be summarised as follows:

	(1)	If the contract is not illegal on the face of it, evidence of extraneous circumstances tending to show illegality should not be admitted unless the circumstances relied upon are pleaded.

	(2)	If unpleaded acts which, taken by themselves, show an illegal object, have been put in evidence (because, perhaps, no objection was raised, or because they were adduced for some other purpose), the court should not act on them unless it is satisfied that the whole of the relevant circumstances are before it.

	(3)	However:

(a)	if the court is satisfied that all the relevant facts are before it, and 

(b) 	if the court can clearly see from them that the contract had an illegal object

the court may not enforce the contract, whether the relevant facts were pleaded or not.

32.	The commentary in paragraphs 16-207 and 16-208 of Chitty mainly relates to the mainstream courts.  We note that proceedings in the mainstream courts are almost entirely adversarial and that, although the procedures of industrial tribunals are also mainly adversarial, there is an inquisitorial element.  (For example, see paragraph (3) of Rule 14 of the Industrial Tribunals Rules).  We note also that industrial tribunals take a more relaxed attitude to pleadings than (for example) the High Court does.  However, it seems to us that the general thrust of 
paragraphs 16-207 and 16-208 provide a broadly accurate description of the situation in industrial tribunals, regarding evidential issues, in the context of allegedly illegally performed contracts. 

33.	The implications, in the present context, of the points made in the relevant paragraphs of Chitty can be summarised as follows:

	(1)	A tribunal has to consider the illegality issue, if there is evidence in respect of participation in illegal performance, even if no party to the litigation has raised the illegality issue.

	(2)	If there is evidence pointing towards “participation”, on the part of a claimant (in the illegal performance of a contract), but the alleged illegality has not been raised in the response, a tribunal should not act upon that evidence, unless the tribunal is satisfied that the whole of the relevant circumstances are before it.

(3)	If a tribunal is not sure that the claimant has “participated” in the illegal performance of a contract, the tribunal should not decline to enforce the contract.

34.	The Department has asked us to consider the illegal performance issue in each of these appeals.  In each of these two cases, the position is as follows.  We have no doubt that the failure of Printyard to make appropriate deductions from the relevant claimant’s pay was a failure which was the result of a blatant disregard for the employer’s obligations under income tax legislation.  We are sure that the relevant claimant contemporaneously knew that, in breach of the requirements of the tax legislation, no deductions were being made.  However, we have received no evidence that the relevant claimant was at any relevant time a party to any misrepresentation, of the true facts, to some third party.  Furthermore, we have received no evidence that the relevant employee was the instigator, or a 
co-instigator, of the under-deduction arrangements.  Accordingly, there is no adequate evidence that either of these two claimants ever “participated” in the illegal performance of the relevant contract.  Therefore, in each case, this tribunal has no duty to decline to enforce the relevant employment contract; indeed, in these circumstances, we have no power to decline to do so.

35.	In each of these two cases, the claimant received a weekly payment of salary in cash, and asserted during these appeals that, in reality, his gross weekly salary should be treated as being the amount received by him in cash, plus an additional sum equal to the amount of gross pay to which he would have been entitled if the pay which he had actually received was net pay (that is, gross pay after proper tax deductions had been made).  For reasons which have already been specified above, we reject that proposition.  We are sure that Mr Hall’s weekly gross pay was the amount which Mr Hall received in cash each week and that Mr McLaughlin’s weekly gross pay was the amount which Mr McLaughlin received in cash each week.

General comments

36.	In each of these two cases, we are sure that the claimant was receiving his weekly pay gross, that is without any deduction in respect of income tax, and that he knew very well, at all relevant times, that the proper deductions were not being made.  Nevertheless, we have decided that there is no sufficient basis for concluding that this tribunal is deprived of jurisdiction, in respect of the claimant’s claims.  

37.	So, from a tax point of view, is that the end of the matter?  In each instance, has the relevant claimant got away with relying upon the statutory guarantee, in respect of redundancy pay and in respect of other employment debts, without having to pay his fair share of taxes?  Not necessarily.  Our understanding is that the combined effect of Regulations 72(5) and 81(4) of the Income Tax (Pay As You Earn) Regulations 2003 is as follows.  Regulation 81(4) empowers HMRC to make a direction pursuant to Regulations 72(5).  Such a direction can be made, in circumstances in which the employer cannot now pay the liability (for example due to insolvency), if the taxpayer knew that the employer had wilfully failed to deduct the correct amount of PAYE.  The effect of such a direction is to make the employee liable for the amount of the under-deduction.  

38.	Pursuant to its obligations as the statutory guarantor in respect of certain debts, the Department will be paying sums to the claimants in each of these cases.  No doubt, if it can lawfully make such disclosure, the Department will consider whether to draw the attention of HMRC to this Decision, and to the facts which have emerged during the course of the hearing which led to this Decision.

39.	For the purpose of determining these appeals, it was unnecessary for us to arrive at any definitive view on the question of whether or not one of these claimants, or both of them, or neither of them, ever claimed more social security benefits than they were entitled to claim, on the basis of a pretence that, while employed by Phoenix, they were receiving less salary than they were in fact actually receiving from Phoenix.  However, we note the following matters:

	(1)	During the course of their employment by Phoenix, the weekly amounts allegedly paid to each claimant as wages seem remarkably small, given the expertise and lengthy work experience of each claimant.

	(2)	It seems implausible, to say the least, that following the collapse of Phoenix, Gary Donnelly would have reacted to that financial debacle by increasing the wages of these two men, in their respective capacities as employees of Printyard.

(3)	The claimants lied to us in relation to their contemporaneous knowledge of the failure of the employer to make proper income tax deductions.

40.	No doubt, if the Department is legally entitled to do so, it will give consideration to the possibility of informing the relevant social security authorities of the facts which have emerged during the course of the hearing in these cases, so that those social security administration bodies can make such relevant enquiries, if any, as they, respectively, think fit.

Employment Judge:       

Date and place of hearing:	14 January and 11 April 2014, Belfast.	

Date decision recorded in register and issued to parties: