Illegal contracts

Case 4: The facts

After he was dismissed on grounds of redundancy with no consultation, Mr Grace was awarded compensation for unfair dismissal. However, during his employment he had opted to be self-employed for a period of time when he was in fact an employee and should have paid tax through the PAYE system. His employer said that part of his employment contract was therefore illegal.

The ruling

The Employment Appeal Tribunal confirmed from existing case law that an employment contract that is operated illegally - by not paying tax, for example - is only unenforceable if the employee has knowledge of the illegality and participates in it. However, it said, this only means that the employee must be aware of the circumstances giving rise to the illegality (in this case, payment of tax on a self-employed basis) and go along with it - s/he does not have to know that the practice is illegal.

As the tribunal had not considered this illegality's effect on Grace's unfair dismissal claim, his case was sent back to be reconsidered.

Grace v BG Components Ltd & another EAT/0006/05