Appeal No. EAT/992/94

	EMPLOYMENT APPEAL TRIBUNAL
	58 VICTORIA EMBANKMENT, LONDON EC4Y 0DS

		At the Tribunal
		On 22nd June 1995
	Judgment delivered on 19 October 1995

	Before

	THE HONOURABLE MR JUSTICE MUMMERY (P)

	MISS J W COLLERSON

	MRS P TURNER

MISS A LEIGHTON	APPELLANT

(1) MR MICHAEL MICHAEL, (2) MR D CHARALAMBOUS	RESPONDENTS

	Transcript of Proceedings

	JUDGMENT

Revised

	APPEARANCES

For the Appellant	MR M SUTTON
	(of Counsel)
	Messrs Shawcross & Co
	6 High Street
	Ross-on-Wye
	Herefordshire
	HR9 5HL	

For the Respondents	MR A J WESTON
	Solicitor
	A J Weston
	34 Broomy Hill
	Hereford
	HR4 0LH

MR JUSTICE MUMMERY (PRESIDENT):                     This is an appeal against the decision of the Industrial Tribunal held at Hereford on 21st June 1994 and at Ledbury on 16th and 17th August 1994. The Tribunal heard a claim by Miss Annabel Leighton, in her originating application presented on 9th March 1994, that she had been discriminated against on the ground of sex by the respondents in the course of her employment as a shop assistant in the Ross Fish and Kebab Bar. Miss Leighton's application was rejected in a unanimous decision of the Tribunal notified to the parties on 9th September 1994.  (Her claim for unfair dismissal was withdrawn at the hearing in the Industrial Tribunal.)

	In the full reasons for the decision, the Tribunal held that Miss Leighton could not pursue her claim for sex discrimination because her contract of employment was illegal. An appeal was served by her solicitors on 12th October 1994. The appeal was first heard by the Employment Appeal Tribunal on 16th December 1994 when it was ordered, on a preliminary hearing, that the appeal should be allowed to proceed to a full hearing on the basis that it raised an arguable point of law.

	The proceedings in the Industrial Tribunal took an unusual course.  The Tribunal did not hear all the evidence and were therefore unable to make findings as to whether or not Miss Leighton's complaints of sex discrimination and unfair dismissal were in fact justified. They heard evidence from Miss Leighton for a full day, but made no finding about the truth of the allegations of sexual harassment made by her.  The respondents did not have the opportunity of dealing with those allegations. The view of the Tribunal was that, although the allegations, if accepted, would have amounted to harassment and probably victimisation under the Sex Discrimination Act 1975, they were precluded from dealing with the merits of the case, because Miss Leighton's contract of employment was illegal and could not be relied upon to claim a remedy.  It is argued on Miss Leighton's behalf on this appeal that the Tribunal erred in law in holding that their jurisdiction under Part II of the Sex Discrimination Act 1975 is dependent on the existence of an enforceable contract of employment; that the Industrial Tribunal did not apply the correct legal principles in determining whether Miss Leighton was de-barred from pursuing her complaint on the grounds of illegality; and that the Tribunal were incorrect in concluding, on the facts found by them, that Miss Leighton's conduct precluded her from pursuing remedy under the 1975 Act.

	The Tribunal reached their conclusion on the basis of the following facts.

(1)	From October 1991 until early April 1993, Miss Leighton was in full-time employment with Mr and Mrs Newey as an assistant at their Seven Seas Fish and Chip Shop in Ross-on-Wye. While the Neweys were her employers, income tax and national insurance were deducted from her wages.

(2)	In early April 1993 Mr and Mrs Newey sold the Fish and Chip Shop to Mr Michael Michael, the first respondent in these proceedings. (The second respondent is his partner in the business). Continuity of employment was conceded.

(3)	After Mr Michael took over the business, tax and national insurance were no longer deducted from Miss Leighton's wages. Soon after her first payment she complained about the non-deduction, but Mr Michael refused to deduct the money and said that, if she did not like the way they paid her, she could leave. He did not believe in and would not deduct tax and national insurance and would not employ anybody from whose earnings tax and insurance were to be deducted.
(4)	She did not know of the intention not to deduct tax and national insurance before she became an employee of the Respondent.

(5)	In October 1993 Miss Leighton consulted the Citizens' Advice Bureau. In January 1994 she consulted a solicitor about sexual harassment and also about tax and national insurance.

(6)	Miss Leighton knew that tax and national insurance should have been deducted from her earnings, both for shop work and for additional work peeling potatoes. From April 1993 until the first week of January 1994 she accepted money for working in the shop, despite the fact that no tax or national insurance was deducted. From about June 1993 until January 1994 she accepted money for peeling potatoes, having begun the job knowing that tax would not be deducted.  She carried on that job and received every week money for that, knowing that tax and national insurance had not been deducted.

(7)	On 7th January 1994 Miss Leighton left the employment of Mr Michael and made allegations of unfair dismissal and sex discrimination. No written reasons for dismissal were given, despite an application for them. During the course of the hearing Miss Leighton's solicitor withdrew the claims for unfair dismissal and for the refusal to give written reasons for the dismissal, but proceeded with the claim for sexual harassment.  Leave was granted during the hearing to add Mr Michael's partner and to make a claim of victimisation on the basis that she was dismissed, because her solicitors wrote a letter to the respondents on 6th January 1994 complaining of non-deduction of tax and national insurance and of sexual harassment.

	On that evidence the Tribunal dismissed Miss Leighton's claims under the 1975 Act because the carrying out of her contract of employment involved a fraud on the Inland Revenue and was either void and illegal or, at least, could not be relied upon by her in asserting legal rights. She could not, therefore, make a common law claim under the contract. She was also disentitled from pursuing a claim for a statutory right, such as that created by the 1975 Act.  The essence of their decision in paragraph 8 was in these terms:

		"Accordingly, in order to bring a claim under Sex Discrimination Act 1975 the worker has to show that the discrimination was in the employment field. In order to do that, in our view, it is essential that the worker be able to rely upon a contract of employment. In the present case, in our view, she is not entitled to rely upon the contract because of the illegality to which she was an undoubted party."

They stated, in paragraph 11 of the decision, that she took a profit from the scheme by being paid wages without deduction of tax and national insurance. No tax return had been put in in respect of that money. In the case of money paid for peeling potatoes she entered into that part of the contract knowing that tax and National Insurance would not be deducted.

		"... she was a willing participant with full knowledge of what was going to happen..."

She took the benefit of the fact that any liability in respect of the sum she was paid was deferred for a considerable period.

	The Tribunal reluctantly concluded that they could not consider her claim of harassment and victimisation under 1975 Act. They regarded this as an unfortunate result, but felt compelled, with regret, to dismiss the case.

	In our judgment, the Industrial Tribunal erred in law in declining jurisdiction to determine Miss Leighton's claim for sex discrimination under the 1975 Act.  Although all members of the Appeal Tribunal are agreed that the appeal should be allowed, we are not in full agreement as to the reasons for taking that course.

	In the view of the majority, the legal position is as follows:-
	(1)  The purpose of the 1975 Act is to render unlawful certain kinds of discrimination on the ground of sex, including discrimination in the employment field (Part II of the Act).

	(2)  It is unlawful for a person, in the case of a woman "employed" by him at an establishment in Great Britain, to discriminate against her -
		"... by dismissing her, or subjecting her to any other detriment": S.6(2)(b).

	(3)  A person discriminates against a woman in such circumstances if -
		"On the ground of her sex, he treats her less favourably than he treats or would treat a man": S.1(1)(b).

	(4)  "Employment" in the 1975 Act means 
		"employment under a contract of service or of apprenticeship or a contract personally to execute any work or labour, and related expressions shall be construed accordingly": S.82(1).

	(5)  Those provisions of the 1975 Act must be construed so as to conform, if it is possible to do so without distorting their meaning, with the provisions of Community law: Webb v. Emo Cargo (UK) Ltd [1992] 4 AER 929 at 939 C-D.

	(6)  Article 5.1 of the Equal Treatment Directive (76/207) provides that -
		"Application of the principle of equal treatment with regard to working conditions including governing dismissal, means that men and women shall be guaranteed the same conditions without discrimination on grounds of sex."
	The expression "working conditions" is undefined and is broad in effect.  The emphasis is on the objective conditions of working rather than as the legally enforceable nature of the contract under which work is done.

	(7)  It is accepted by Mr Sutton that there are circumstances in which an Industrial Tribunal is entitled to reject a claim for the enforcement of a statutory employment right on the ground that the applicant is a party to an illegal contract of employment eg, a contract defrauding the Revenue.  For example, in Tomlinson v. Dick Evans U Drive Ltd [1978] IRLR 77 the Employment Appeal Tribunal dismissed an appeal of an employee whose claims for unfair dismissal and redundancy payments had been rejected by an Industrial Tribunal on the ground that weekly bonus payments in cash to the employee were made to avoid income tax.  There was a deliberate fraud on the Revenue which rendered the contract of employment illegal.  Both parties knew that it was a fraud and knowingly participated.  The employee's claim therefore failed.  The Appeal Tribunal held that -
		(a)  Someone who tries to assert in the courts and tribunals a right contained in an illegal contract will not succeed, because there is a general principle of public policy: "the dishonest party to the swindle cannot recover upon the contract".  (Paragraph 10) eg, Miller v. Karlinski [1945] 62 TLR 85 (an unsuccessful claim for the recovery of arrears of salary and travelling expenses).

		(b)  It does not make any difference that the right sought to be enforced, such as redundancy pay or the right not to be unfairly dismissed, is not a right contained in the contract itself, but is a right conferred by statute and superimposed on the contractual rights of the parties.
			"But the prerequisite to the existence of these rights is that the person who seeks to enforce them has been employed under a contract.  The rights, though creatures of statute, in our judgment, depend on, or arise from, the contract just as do the common law rights which arise from the contract itself".  (Paragraph 12)

     		 	(Paragraph 13)
			"It is the employee's situation as a party to the contract of employment which is the subject of protection by the legislation which it did not enjoy under the common law.  Unless he was a party to the contract of employment, the statute cannot, and does not give him a right not to be unfairly dismissed, or the right to receive a redundancy payment."

	See also Newland v. Simons and Willer Hairdressers) Ltd [1981] IRLR 359 at 364 (paragraph 24) which emphasises that the essential question is whether the employee has knowingly been a party to the deception on the Revenue.  The employee is precluded from "enforcing any employment rights".  Statutory rights are not intended to be provided by the relevant employment legislation to those who knowingly break the law by committing or participating in a fraud on the Revenue.  As appears from Salvesen v. Simons [1994] IRLR 52 (see also Annandale Engineering v. Samson [1994] IRLR 59 ("occasional payments)), the Appeal Tribunal has consistently rejected the contention that Parliament could not have intended an employee to lose his statutory rights because his contract involved illegality or that the doctrine or severance of the illegal part should be applied and leave the remainder of the contract enforceable.

	Where the employees' claims, whether common law or statutory, are directly founded upon a contract knowingly tainted with illegality, they are treated as unenforceable on the grounds of public policy.  The illegality doctrine is applied, even if the result is that the applicant employee suffers a severe penalty or disability as a result of an illegality, and even if only small sums of money are involved.

	(8)  We agree with Mr Sutton that the principles in the unfair dismissal and redundancy cases are not applicable in the present case.  The starting point is the statute which confers the right not to be discriminated against on the ground of sex.  The persons on whom that right is conferred include a woman, such as Miss Leighton, who is "employed" at an establishment in Great Britain by a person who subjects her to detriment by treating her, on the ground that she is a woman, less favourably that he treats or would treat a man.  Miss Leighton is prima facie within the scope of the class of persons entitled to statutory protection.

	(9)  It is accepted by Mr Sutton that, in order to reach that conclusion, it is necessary to consider the contract between Miss Leighton and Mr Michael to decide whether Miss Leighton falls within the protected class of persons entitled to complain of unlawful discrimination.  He points out that that class is wider than the class of persons entitled to claim unfair dismissal and redundancy.  The courts have interpreted the definition of "employment" in the 1975 Act to include self-employed persons who supply personal services: Quinnen v. Hoveles [1984] ICR 525 and Mirror Group v. Gunning [1986] ICR 145.

	(10)  The cases in which an illegal contract of employment has been held to disqualify applicants for unfair dismissal and redundancy payments are distinguishable from claims under the Sex Discrimination Act.  For the purposes of claiming unfair dismissal or redundancy payments the applicant is making a claim which is directly founded upon, relies upon and seeks to enforce the contract of employment.  In order to invoke the statutory rights not to be unfairly dismissed and to claim redundancy payments, the employee has to establish not only that he was an employee  but also that he was dismissed by his employer on the termination or expiration of the contract.  Dismissal is an essential part of the cause of action.  The definition of dismissal in S.55 of the Employment Protection (Consolidation) Act 1978 refers expressly to the contract under which the employee is employed and to its termination with or without notice and to the expiration of fixed term contracts without renewal under the same contract.  The definition also embraces constructive dismissal which involves examining possible breaches of the contractual obligations by the employer.  As dismissal is an essential ingredient of the statutory right, the employee who invokes the statutory right has to refer to the contract of employment, but not just to identify himself as an employee.  He has to found his claim on the contract since, whether he is dismissed or not within the meaning of the statute,  must rest on the contract.

	(11)  Protection under the 1975 Act against sex discrimination involves a reference to the contract to determine whether the person is "employed" within the meaning of the statute, but the claim of sex discrimination does not involve enforceing, relying on or founding a claim on the contract of employment.  In brief, the right not to be discriminated against on the ground of sex is conferred by statute on persons who are employed.  There is nothing in the statute to disqualify a person, who is in fact employed, from protection by reason of illegality in the fact of, or in the performance of, the contract of employment.  There is nothing in public policy to disqualify a person from the protection of the statute, if the claim to the statutory protection is not founded on, or is not seeking to enforce, contractual obligations.

	The minority member agrees that the appeal should be allowed, but not for the reasons stated above.  Her reason for allowing the appeal is that Miss Leighton should not, for the purposes of the doctrine of illegal contracts, be regarded as knowingly a party to a fraud on the Revenue on the basis of the facts found in this case.  She points out that Miss Leighton entered employment and continued employment with Mr and Mrs Newey without any illegality on either side.  Income Tax and National Insurance deductions were properly made.  Miss Leighton never agreed anything different with the Respondents who became her employers by reason of a transfer.  In fact, she complained to them about the failure to make the statutory deductions.  They refused in categorical terms to make the deductions.  She consulted the Citizens' Advice Bureau.  She later consulted solicitors who wrote to her employers about it.  In those circumstances it is not correct to regard her as knowingly a party to the fraud on the Revenue.  It was not reasonable to expect her, in the circumstances, to have ceased her employment.  As for the arrangements about the potato money, that was an arrangement with the Respondents which did not have the effect of making her contract for shop work illegal, which was legal in its inception and was transferred by virtue of the 1981 Regulations to the Respondents.

	For all those reasons the appeal is allowed and the case is remitted to a different Industrial Tribunal for a hearing on the merits of Miss Leighton's claim.