Decision of the Upper Tribunal
(Administrative Appeals Chamber)
As the decision of the First-tier Tribunal (made on 15 September 2010 at Colwyn Bay under reference 187/09/00138) involved the making of an error in point of law, it is SET ASIDE under section 12(2)(a) and (b)(i) of the Tribunals, Courts and Enforcement Act 2007 and the case is REMITTED to the tribunal for rehearing by a differently constituted panel.
DIRECTIONS:
A.	The tribunal must undertake a complete reconsideration of the issues that are raised by the appeal and, subject to the tribunal’s discretion under section 12(8)(a) of the Social Security Act 1998, any other issues that merit consideration. 
B.	In particular, the tribunal must investigate and decide whether Mr A was a worker between 1 July 2008 to 19 October 2008. 
C.	In doing so, the tribunal must not take account of circumstances that were not obtaining at the time of the claim: see section 12(8)(b) of the Social Security Act 1998. Later evidence is admissible, provided that it relates to the time of the decision: R(DLA) 2 and 3/01.
Reasons for Decision
A.	What I have to decide
1.	Mr A worked for a restaurant. His employer paid him cash in hand without deducting income tax or national insurance. The issue is: does that prevent Mr A being a worker in EU law? The answer is: no.
B.	How Mr A came to claim an employment and support allowance 
2.	Mr A is Dutch. He came to the United Kingdom on 16 April 2008 for a three week holiday in Snowdonia. He liked it so much that he decided to stay. His first job was with the Youth Hostel Association; that lasted until 18 June 2008. He was paid in the usual way, with income tax and national insurance deducted from his wages. His next job was with a restaurant; this lasted from 1 July 2008 to 19 October 2008. He was paid cash in hand, with no deductions. He was not given terms and conditions, pay slips or a P45. The claimant’s representative said (page 54a): ‘The practices of the employer forced Mr A to leave the employment’. But it is not clear whether those ‘practices’ related to deductions or hygiene. Mr A told the tribunal that the job came to an end when the restaurant closed. He later reported the owner for breaches of the food and hygiene regulations. He then applied for a jobseeker's allowance. This was subsequently awarded for the inclusive period from 22 November 2008 to 31 December 2008. By the time this award was paid, he had been assaulted and was unable to work. That led him to claim an employment and support allowance from 2 January 2009. The Secretary of State refused the claim on 10 February 2009 on the ground that the claimant was a person from abroad. As such his applicable amount was nil and he was not entitled to an allowance. In simple terms, he was not entitled to an allowance because he did not have a right to reside in the United Kingdom. 
C.	The appeal to the First-tier Tribunal 
3.	Mr A exercised his right of appeal to the First-tier Tribunal with the help of Adrian Thomas Advice. The case came before Judge Williams on two occasions. On 22 September 2009, she adjourned for further submissions from the Secretary of State. And on 17 February 2010, she adjourned for Mr A to provide details of his work at the restaurant. The appeal was finally heard on 15 September 2010 by a different judge. This judge took the point, which had not been raised before, that Mr A’s contract of employment was illegal. He dismissed the appeal on that ground. His decision notice read:
The decision of the Secretary of State issued on 10 February 2009 is confirmed.
It was common ground between the Presenting Officer and the Representative that to establish entitlement the appellant needed to establish that he was a “Worker” between 19/06/2008 and 19/11/2008.
For the substantial part of the above period the appellant’s wages were “cash in hand” and not subject to the deductions of either Income tax or national insurance contributions.
In the above circumstances I am not satisfied that the appellant can be treated as a “Worker” during the above period. Accordingly he has not established a right to reside in the UK.
4.	The judge expanded on this in his written reasons:
I took the view that the appellant could not retain “worker status” while effectively being employed in the black market. He knew that he was required to pay income tax and National Insurance as he had done in his previous employment. He had accepted a position and worked for several months without fulfilling those legal obligations. It had not been raised as an issue prior to or during the appeal that the appellant was unaware of his obligations in this regard. 
In seeking leave to appeal, the appellant’s representative seems to be asserting that the appellant was not knowingly a party to the deception of the Revenue. I cannot see how this can be the case, given that he accepted employment that paid him cash in hand and continued to undertake that employment until the business closed. I am not aware of any concept in European law that would treat employment of this kind as valid for the purpose of attaining worker status. 
D.	Why the point taken by the judge matters
5.	Mr A was only entitled to an employment and support allowance if he had a right to reside in the United Kingdom: regulations 69(1) and 70 of, and paragraph 11 of Schedule 5 to, the Employment and Support Allowance Regulations 2008. 
6.	As a Dutch national, he was an EU citizen. As such he had a right to reside for three months under Article 6 of Directive 2004/38/EC. After that, his right to reside depended on Article 7:
Right of residence for more than three months
1.	All Union citizens shall have the right of residence on the territory of another Member State for a period of longer than three months if they:
(a)	are workers or self-employed persons in the host Member State; …
3.	For the purposes of paragraph 1(a), a Union citizen who is no longer a worker or self-employed person shall retain the status of worker or self-employed person in the following circumstances: 
(a)	he/she is temporarily unable to work as the result of an illness or accident;
(b)	he/she is in duly recorded involuntary unemployment after having been employed for more than one year and has registered as a jobseeker with the relevant employment office; …
7.	If Mr A was a worker while working at the restaurant, he retained that status when he was looking for work after it closed: Article 7(3)(b). He further retained it when he was temporarily unable to work following his assault: Article 7(3)(a). The effect of the judge’s decision was that he was not a worker during his time at the restaurant. And that meant that he had no status to retain when he lost his job and was injured. 
E.	The error of law on illegal contracts of employment
8.	The judge did not make sufficient findings of fact to justify his conclusion. Nor was the written evidence sufficient to allow him to make the necessary findings. (There is no record of proceedings in the papers, so I do not know what the oral evidence was.)
9.	It is necessary to distinguish: (i) contracts that are illegal as formed from those that are illegal as performed; and (ii) the effect on the employer from the effect on the employee. 
10.	It is not illegal for an employer to pay an employee free of income tax and national insurance: du Parcq LJ in Miller v Karlinski (1945) 62 TLR 85 at 86. It is only illegal if the employer fails to account for the appropriate amounts to Her Majesty's Revenue and Customs. 
11.	An employer who performs a contract in a way that defrauds the authorities cannot enforce the contract: Newland v Simons & Willer (Hairdressers) Ltd [1981] ICR 521 at 527. 
12.	The effect on the employee depends on two factors: (i) the employee’s knowledge of how the contract will be performed; and (ii) the nature and extent of the employee’s participation. As to knowledge, the test is subjective (what did the employee know?) not objective (what ought the employee to have known?). See Newland at 528. As to participation, the test is whether ‘there has been sufficient degree of participation by the employee’: Hall v Woolston Hall Leisure Ltd [2001] 1 WLR 225 at paragraph 38.
13.	In applying those principles to this case, the tribunal proceeded without evidence and on unjustified assumption and inference. Mr A’s contract could have been performed lawfully; it was not illegal as formed. The judge assumed that the employer had failed to account for the tax and contributions. On that basis, the contract would be illegal as performed and the employer would not be able to enforce it. But there was no evidence in the papers that Mr A’s employer had failed to account for the tax and contributions. The judge did not make any findings that that had happened. He did not draw an inference that that had happened. He merely assumed that it had from the method of payment. 
14.	The judge said that Mr A must have been a knowing party to the deception. On that basis, to quote Newland at 530:
… where both employer and employee knowingly commit an illegality by way of fraud on the revenue in the payment and receipt of the employee’s remuneration under the contract of employment, which is an essential part of such a contract, then we think that there can be no doubt that this does turn it into a contract that is prohibited by statute or common law, and consequently the employee is precluded from enforcing any employment rights she might otherwise have against her employer.
The judge only made his remark in response to the application for permission to appeal. He did not say that he had found it as a fact at the hearing. He seems to have thought it was inevitable that Mr A knew and colluded in what his employer was doing. That is not a necessary inference in the circumstances. The facts of this case are very similar to those in Newland. The employee there was paid weekly in cash. The industrial tribunal found that she either knew or should have known what her employer was not accounting for the tax and contributions. The Employment Appeal Tribunal remitted the case for rehearing to clarify the employee’s knowledge. And it did so despite the fact that she had previously been the manager of a hairdressing salon who might be expected to understand tax arrangements. 
F.	The error of law on worker in EU law 
15.	Assume now that the judge was right that Mr A’s contract of employment was illegal and that he could not enforce it. Even on that assumption, he was wrong to decide that that prevented him being a worker. 
16.	Worker is a European concept. That means that it is defined by European law, through the decisions of the Court of Justice of the European Union. Work means the performance of services under the direction of another for remuneration: Lawrie-Blum v Land Baden-Wurttemberg [1986] ECR 2121, paragraph 17. The services must be in pursuit of an economic activity: Levin v Staatssecretaris van Justitie [1982] ECR 1035, paragraph 17. It does not matter that the job is short-term or temporary. In Lawrie-Blum, the Court included in its definition of work that it should be for a certain period of time. But it has since held that work for any given period is not essential: Lair v Universitat Hannover [1988] ECR 3161, paragraph 42. The Court has applied the same test whether the activity undertaken is part-time, irregular or intermittent: does it represent the pursuit of an effective and genuine economic activity? See Levin paragraph 11. Activities which are on such a small scale as to be purely marginal and ancillary do not amount to work. See Levin paragraph 17. 
17.	I am not aware of any decision of the Court of Justice that deals with the issue I have to decide. I can only approach it on the basis of general principle and the existing caselaw. 
18.	Article 45 of the Treaty on the Functioning of the European Union guarantees freedom of movement for workers. That is one of the fundamental freedoms of the Union. As such, it must be interpreted so that it has a broad scope. A worker is someone who does work. The Court’s definition of work involves an essentially factual enquiry. The element are: (i) services performed (ii) under direction (iii) for payment. The Court has never said that these elements must be found within any legal relationship. Nor has it said that the elements present must be sufficient to constitute such a relationship. 
19.	The Court has qualified its definition of worker. The services have to be economic, genuine and effective, not marginal and ancillary. Again, the focus is on the factual position, on the nature of the services, not on the legal relationship within which they are performed. In other words, the Court has defined worker as an economic status, not a legal one. It has legal consequences, but it is not necessarily legal in nature. That is consistent with giving a broad scope to a fundamental freedom of the Union. Most work takes place within a legal relationship of an employment contract. But it need not do so. To limit it to a particular category of contractual relationship would limit its scope. And that would be incompatible with the fundamental nature of the freedom of movement. 
20.	There is also this to consider. Worker is an EU concept. That means that it has an autonomous meaning in EU law; it does not depend on the law of the member State in which the activity is undertaken. This is essential if freedom of movement for workers is to be effective as an EU right. The judge in this case applied particular domestic rules of public policy on the enforceability of contracts. There may well be the same or similar rules in other member States. But there may also be differences of substance or detail; it would be surprising if there were not. To allow States to apply their own rules is contrary to the EU nature of the concept: Hoekstra v Bestuur der Bedrijfsvereniging voor Dertailhandel en Ambachten [1964] ECR 177.
G.	Why I have directed a rehearing
21.	At the least, the judge misdirected himself on EU law. I must set it aside on that ground alone. That leaves outstanding the factual issues on which Judge Williams gave directions on 17 February 2010. The claimant’s representative has invited the Upper Tribunal to re-make the decision rather than direct a rehearing. He has argued that no more evidence is available than is in the papers. That may be so, but there may still be value in an oral hearing before a First-tier Tribunal. The judge will have the chance to question Mr A about the work that he did and judge the reliability of his evidence. That is why I have directed a rehearing. 

Signed on original
on 16 April 2012	Edward Jacobs
Upper Tribunal Judge