Legal Contracts And Employment Claims

What is an illegal contract?

An “illegal” contract is one that involves or is based on criminal wrongdoing. It must  not be confused with an invalid contract or a contractual term which would not be enforceable in the courts.

Most employment contracts involving illegality involve either workers who have no right to work in the U.K. or schemes to defraud the Inland Revenue.

How does illegality affect the contract?

Some clauses in contracts are void because they are illegal, but do not effect the contract as a whole – for example in Steelcraft v Ellis (2008) 0536/07/ET a clause in a contract which said that the agreement was not intended to create legally enforceable rights was held to be void under Section 203 Employment Rights Act 1996 but the rest of the contract was valid.

However, where the purpose of the contract involves criminal activity the courts are unwilling to allow the parties to have any rights under it. The courts cannot be seen to condone illegality and will deem the parties to a contract tainted with illegality to have forfeited their rights of legal redress because of their complicity in illegal activity. This is not a new idea -  in the 1775 case of Holman v Johnson it was said “no court will lend its aid to a man who founds his cause of action upon an immoral or illegal act”.   

However, in employment law, where a person’s livelihood is affected, considerable injustice can be caused by a rigid rule, and the courts have said that “a middle course between two unacceptable positions” should be steered where possible (Saunders v Edwards (1987) 1WLR).   Similar sentiments were expressed in Euro Diam Limited v Bathurst (1988) 2WLR 517 where it was stated that “there was sometimes a need to balance reprehensible conduct as between employer and employee”.

Contracts, including employment contracts, can also be deemed illegal because they are against public policy or entered into for immoral purposes. (This is why e.g. betting contracts will not be enforced - although conversely contracts for differences (effectively spread betting) will be).     

This will be a question of degree as to whether or not the immorality is “merely incidental” to an otherwise valid contract. In Coral Leisure Group Limited v Barnett (1981) 1RLR 204) an executive was entitled to bring a claim for unfair dismissal despite the fact that in the course of his employment he hired prostitutes for his employers clients. He had not been specifically employed to do this, and so the contract survived what was an immoral manner of performing an otherwise legitimate agreement.

Where a contract is lawful in its inception it will not become illegal and unenforceable by any incidental act of illegality in the performance of the contract – Cohen v Cebrian UK) Limited (2003) CA

Discrimination claims which do not depend on breach of contract

These cases concern illegality of employment contracts. If the contract itself is illegal, there will generally be no claim if that contract is breached. However, some employment rights do not depend upon a lawful contract of employment – in particular discrimination cases.

In Vakante v Stanhope School (2004) IDS Brief CA a Croatian asylum-seeker was employed as a maths teacher by deliberately misleading his employers by telling them that he did not need permission to work in the UK. He was dismissed after 8 months and brought a claim for racial discrimination and victimisation (he did not have sufficient continuity of employment to bring an unfair dismissal claim). Held: on the facts public policy on illegality outweighed the public policy on discrimination in employment.

N.B.   Under the Immigration Asylum & Nationality Act 2006 employers who employ illegal migrant  workers are liable to penalties up to £10,000 per employee, and where they knowingly employ illegal workers they face up to 2 years in prison andor an unlimited fine.    It is necessary to check passports and immigration documents (and prove that this has been done) to be able to rely on a statutory defence.

In Hall v Woolston Hall Leisure Limited (2000) IRLB 645 CA where an employee knew from her pay slips that her employer was defrauding the Inland Revenue (and her contract of employment was therefore tainted with illegality) it was held that she was entitled to damages for sexual discrimination when she was dismissed because of her pregnancy.

On the face of it these are 2 conflicting discrimination cases. They were recently analysed by the Court of Appeal in Hounga v Allen [2012[ EWCA Civ609 where it was held that there was no conflict as Mrs Hall  was not an active participant in her employer’s illegality, although she had acquiesced in it, whereas Mr Vakante by contrast was an active participant in the illegality. In the Hounga case, a claim for unfair dismissal, breach of contract, unpaid wages and holiday pay were all dismissed by the Employment Tribunal on the basis that she had now lawful contract. Her claim for racial discrimination  was not dependant on there being a valid and legal contract of employment. The Court of Appeal had to consider whether she could bring a race claim even though she was working illegally.  They held that she could not do so because Mrs Hounga (a Nigerian national employed as an au pair) was fully aware that she was not entitled to work in the UK. The Court of Appeal expressed sympathy for her as  a young and vulnerable person, who at times had been taken advantage of, but said “if this court were to allow her to make that case, and so rely upon her own illegal actions, it would be condoning her illegality. That is something the court will not do”.

It therefore seems that the test for illegality depends on the extent to which the claim is inextricably linked to the employee’s own conduct and whether or not the employee is a willing participant in the illegality.

If you want to discuss any employment issues please contact Janet Long on her direct dial 020 3254 1435 of by email at j.long@pj-h.co.uk

The contents of this article are intended for general information only.  It is not a substitute for legal advice, and shall not be deemed to be or constitute legal advice.  We therefore cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article. We will, however, be pleased to advise you on the specific facts of your case