Appeal No. UKEAT/0005/07/DA

EMPLOYMENT APPEAL TRIBUNAL
58 VICTORIA EMBANKMENT, LONDON EC4Y 0DS

	At the Tribunal
	On 27 March 2007
Judgment handed down on 6 June 2007

Before
THE HONOURABLE MR JUSTICE UNDERHILL
(SITTING ALONE)

MISS L DAYMOND	APPELLANT

ENTERPRISE SOUTH DEVON	RESPONDENT

Transcript of Proceedings

JUDGMENT

	APPEARANCES

For the Appellant	Ms Jill Brown 
(of Counsel)
Instructed by:
Messrs David McCrum Ltd Solicitors
The Long House
Lubborn Lane
Baltonsborough
Glastonbury
Somerset BA6 8QP	
For the Respondent	Mr Declan O’Dempsey
(of Counsel)
Instructed by:
Messrs Kitson Hutchings Solicitors
3-4 Vaughan Parade
Torquay
Devon 
TQ2 5EF	

SUMMARY
Unfair Dismissal – Illegality
Claimant needed to rely in order to show qualifying service on a period when her services had been supplied to the putative under a contract between it and a company owned by her – Tribunal held that she was in fact an employee during that period but that she could not rely on that period of her employment because the arrangement had involved a loss to the Revenue – It declined to rule on whether she was consciously defrauding the Revenue on the basis that that was irrelevant – Decision upheld – Salvesen v. Simons [1994] ICR 409 followed. 
THE HONOURABLE MR JUSTICE UNDERHILL

1.	This is an appeal from the decision of an Employment Tribunal Chairman, sitting at Exeter, dismissing the Appellant’s claims for unfair dismissal and wrongful dismissal on the basis that the contract of employment on which they were based was tainted by illegality.  The relevant facts can be stated fairly shortly:

(1)	The Respondents are a non-profit-making organisation providing support and advice to businesses in South Devon.  The Appellant is a businesswoman.  She (or a company owned by her) was initially the tenant of a business unit owned by the Respondents. 

(2)	The Respondents’ Managing Director left in early 2005.  In late 2004, in anticipation of his going, the Chairman of the Respondents approached the Appellant to see if she would be willing to act as “Director in Charge”; and she agreed.  She started work in mid-January 2005.  It was at that point envisaged that she would only be working one day a week, but it very soon became clear that she was needed on a full-time basis, and from an early stage she began to work five days a week. 

(3)	When the arrangement for the Appellant to work for the Respondents was first made she (in the words of the Employment Tribunal Chairman) “was given the option of being paid through the Respondents’ payroll or invoicing the Respondents through one of her companies”.  She chose the latter option.  The company in question was called GFI Corporate Solutions Ltd.  The Appellant was the sole shareholder and Director, and the company had no other activities at the material time.

(4)	That arrangement remained in place until 22 April 2005, when – no doubt in recognition of the fact that the job had turned out differently to what had been originally been envisaged – the Appellant was offered and accepted a formal contract of employment as Managing Director. 

(5)	Under the arrangements in place from mid-January to mid-April the Respondents made payments to GFI in respect of the Appellant’s services totalling £8,658.  In conformity with the ostensible nature of the arrangements, they of course made no deductions of income tax from those payments.  Out of that total, GFI had, at the time of the hearing, paid some £3,000 to the Appellant.  The Chairman’s findings as to precisely how these payments were recorded in returns to the Revenue by the Appellant and/or GFI are not entirely clear; and there was certainly no evidence that the Revenue had taken objection to what had occurred.  But on any view the Revenue had not received sums that it should have received by way of PAYE if the Appellant had been treated as employed by the Respondents during the relevant period and if the payments to her had thus been treated as emoluments of that employment.  

(6)	On 26 January 2006 the Appellant was dismissed by the Respondents.

2.	On 2 March 2006 the Appellant commenced proceedings in the Employment Tribunal claiming that she had been unfairly dismissed by the Respondents and also claiming “notice pay” (i.e., strictly, damages for wrongful dismissal).  As regards the unfair dismissal claim, the Respondents took the point that she had only been employed since 22 April 2005 and so had insufficient qualifying service.  The Appellant’s response was that she had, in law, been an employee of the Respondents ever since she started to work for them at the beginning of January.
3.	That issue came before the Chairman on 20 June 2006 and was adjourned part-heard until 11 September 2006.  In his judgment, which appears to have been delivered orally on the latter date but which was formally sent to the parties on 10 October 2006, the Chairman found that the Appellant had indeed been employed by the Respondents throughout the period from mid-January.   But he went on to hold that she was not entitled to pursue either her claim for unfair dismissal or her claim for notice pay since the contract on which she relied was tainted by illegality: the arrangements for payment between January and April 2005 involved a breach of the parties’ obligations under the Taxes Acts.  Para 13 of the Reasons is in the following terms:
“I then considered the issue of illegality.  I have been referred to the decision of the Court of Appeal [recte the Employment Appeal Tribunal] in the case of Salvesen v Simons [1994] IRLR 52. It seems to me that the circumstances set out in that case bear a remarkable similarity to the circumstances here, save that in the Salvesen case only part of the remuneration was diverted through a different organisation whereas in this case it was all paid through the vehicle of GFI.   I bear in mind that Miss Daymond is an experienced businesswoman.  I found her evidence on this matter unsatisfactory and perhaps the most difficult question I have had to resolve today is whether or not this was a case of innocent mismanagement of the company with no real thought as to the tax implications and the responsibilities that the Claimant bore as the Director of that company or whether there was something more sinister as opposed to an innocent muddle.  In my judgment the case of Salvesen puts the matter beyond doubt.  There, the effect of the arrangement which nobody considered to be illegal was to defer at least, if not avoid, the payment of tax.  In this case that result has been achieved in significant measure and the Court of Appeal was clear that if a party knew what was being done it was irrelevant that he did not know that it was illegal.  Applying that principle, I have come to the conclusion that this was a contract tainted with illegality and cannot be enforced through the Tribunal.”

Accordingly, while expressing some criticism of the Appellant’s evidence, the Chairman felt able to decide the issue without making a finding as to whether she was deliberately setting out to gain an illegitimate tax advantage.

4.	The Appellant appeals against that decision.  There is no challenge by the Respondents to the decision of the Chairman that the Appellant was an employee of theirs between mid-January and mid-April 2005.  The Appellant has been represented before me by Miss Jillian Brown and the Respondents by Mr. Declan O’Dempsey.  I am grateful to both for their helpful submissions. 
5.	It is necessary to consider separately the claims for unfair dismissal and for notice pay.

THE UNFAIR DISMISSAL CLAIM
6.	As appears from the passage from the Reasons set out above, the Chairman held that the facts of the present case were indistinguishable from those considered by the Employment Appeal Tribunal in Salvesen v Simons, to which I will refer as reported at [1994] ICR 409.  It is necessary for me to consider what was decided in that case in some detail.

Salvesen v. Simons
7.	The essential facts of Salvesen are recited in the judgment of Lord Coulsfield, as follows (at pp 411-412):

“The employee was employed at Whitburgh estate, near Pathhead, Midlothian, from 5 April 1983 until 29 February 1992. He was originally employed with the title of farm manager but, with effect from October 1987, his job title was changed to estate manager. He was employed by Whitburgh Mains Ltd. until mid-July 1991, at which date the employer purchased the estate and obtained entry to it. By virtue of regulation 5 of the Transfer of Undertakings (Protection of Employment) Regulations 1981 (S.I. 1981 No. 1794), the employee's employment was continued with the new employer. In addition to his employment, the employee operated, with his wife, a partnership called Jonor Services, which owned and obtained income from certain properties and also provided a farming consultancy service. As at January 1987, the employee's salary, as farm manager, amounted to £12,200. At his request, his then employer agreed that, with effect from 1 January 1987, his current remuneration would be paid as £10,000 as salary, subject to normal deductions in respect of tax and national insurance, and as to £2,200 as a management fee to be paid to Jonor Services. It was further agreed that the salary would be paid monthly, as before, and that the partnership would invoice the employer in the normal way, and that the employee would be responsible for any taxation and national insurance liabilities which might arise on the management fee. That arrangement was acted upon. By the time when the employer became the employee's employer, the employee was entitled to total remuneration of £18,374, divided into salary of £15,770, which was subjected to the usual deductions, and a management fee of £2,604 payable to Jonor Services, without deductions.
The nature of those arrangements, and the understanding of the parties to them, was the subject of a considerable amount of evidence before the industrial tribunal. The industrial tribunal found that Jonor Services is a partnership organised under the law of Scotland, which keeps such books and records as are required, makes tax returns, and pays such tax as may be required of it by the Inland Revenue. However, they also found that neither Jonor Services nor either of its partners provided any services, either to the employer or to his predecessors as owners of the estate, other than that the employee worked, in accordance with his contract of employment, as farm manager and, latterly, as estate manager. The contract of employment required the employee to devote his full-time personal attention to his job. The industrial tribunal also found that all the parties to the original arrangement, i.e. the persons concerned with the management of the estate before it was acquired by the employer, and the employee, genuinely believed that the arrangements were legitimate and above-board, and that there was nothing illegal about the method of payment of the remuneration due under the contract of employment. The industrial tribunal pointed out that the effect of the arrangement was that the employer did not deduct tax or national insurance contributions from the management fee which was actually paid to Jonor Services; that the payment of any tax on that proportion would be deferred because the partnership would be taxed under Schedule D of the income tax legislation rather than under the PAYE system; and that legitimate business expenses could be allowable against income taxed under Schedule D which could not have been allowed against the proportion of the employee's remuneration paid to Jonor Services if it had been paid to him and taxed under Schedule E. The employee and the employer's predecessors were all clearly aware of the arrangement which had been made and put into effect, but none of them knew, believed, nor suspected that the arrangement was in contravention of the legislation for the management of taxation, and, to that extent, illegal. The industrial tribunal also found that the question of the payment to Jonor Services was raised with the employer after he became owner of the estate and that, contrary to certain evidence given by him, he had not troubled to make inquiries about the legitimacy of that payment.”

8.	The Industrial Tribunal decided that those arrangements were illegal.  They said, as quoted by Lord Coulsfield at pp 412-413:

“The first issue, logically, is whether the contractual arrangements which commenced in or about January 1987 and continued thereafter until the time of the transfer, were in fact illegal. We are driven to the conclusion that, in the technical sense, they were. The whole sum payable for the work undertaken by the [employee] at Whitburgh estate was, in our view, properly to be regarded as the emoluments of his employment as estate manager. As a result, in our opinion, the whole sum was then subject to Schedule E taxation including the PAYE system under the primary and subordinate legislation which Mr. Dobie, who appeared for the employer, drew to our attention. Accordingly, it follows that the arrangement which was reached in January 1987 was calculated to, and did, amount to a breach of the statutory provisions for the management and collection of income tax. It was a scheme which, as we have found, had at least the result of deferral of tax and, it would seem, at least potential evasion of tax which would have been lawfully due under Schedule E and payable via the PAYE regulations.”

9.	As regards the effect of that illegality, the Industrial Tribunal in Salvesen was divided.  The majority held - to summarise - that since the parties has acted in good faith and without any intention to act illegally, and since any loss to the Revenue would be small, “there was no moral turpitude whatsoever which would lead to the necessary application of the public policy rule”.  The minority view, which was that of the Chairman, was summarised by Lord Coulsfield at pp. 413 – 414.  He said:

“[The chairman] drew a distinction between cases in which a contract which, if performed according to its terms, is capable only of being performed so as to lead to evasion or improper deferral of tax, and a contract which, according to its terms, need not necessarily involve such evasion or improper deferral. He held that the employee's knowledge of the illegality was irrelevant in the first case, but relevant in the second. He went on:
Applying those principles to the facts of this case as found, there is a statutory illegality, however technical, arising from the agreement between the [employee] and the [employer's] predecessors which had, as its effect, evasion or improper deferral of tax. The agreement, operated according to its terms, necessarily had that result.
He went on to hold, in accordance with the principles previously set out, that the lack of knowledge on the part of all those concerned, of the illegality of the arrangements, made no difference to the employee's inability to recover; and that there were no public policy issues which could be applied to moderate the application of the principle that action would not be available on an illegal contract.”

10.	Lord Coulsfield conducted a thorough review of the case-law on illegality as it then stood (all, as it happens, English cases).  He dealt at an early stage of his review with the decision of the Court of Appeal in Miller v Karlinski (1945) 62 TLR 85.  In that case the employee sued in the County Court for arrears of salary.  The contract included a term under which he would be paid a sum by way of “expenses” which was substantially in excess of his actual expenses, thereby depriving the Revenue of tax on the amount in question; but the Judge held that that did not render the contract unenforceable because it was not “in the mind of either party that there would be a small loss to the Revenue”.  Du Parcq L.J., in the leading judgment, indicated some scepticism as to the Judge’s finding as to what was in the parties’ minds; but he held that it was in any event irrelevant.  He said:

“In truth, it makes no difference whether or not the parties were ignorant that what they were doing was illegal.  Ignorance of the law cannot excuse them.”

Lord Coulsfield also referred to the decision of the Court of Appeal in Napier v National Business Agency Ltd [1951] 2 All ER 264, which he regarded as being to the same effect.  

11.	Having noted the effect of those two cases Lord Coulsfield proceeded to consider a series of subsequent cases in the Employment Appeal Tribunal and the Court of Appeal in which the illegality rule had been considered - specifically Tomlinson v Dick Evans “U” Drive Ltd [1978] ICR 639; Shelley v Paddock [1980] QB 348; Corby v Morrison [1980] ICR 564; Newland v Simons & Willer (Hairdressers) Ltd [1981] ICR 521; Hyland v JH Barker (North West) Ltd [1985] ICR 861; Saunders v Edwards [1987]  1 WLR 1116; Euro-Diam Ltd v Bathurst [1990] 1 QB 1; and Hewcastle Catering Ltd v Ahmed [1992] ICR 626.  His conclusion was that none of those later authorities affected the position as it appeared from Miller v Karlinski and Napier v National Business Agency Ltd.  The final two paragraphs of his judgment are in the following terms:

“The recent cases, which we have summarised, do clearly stress that the foundation of the ex turpi causa rule is public policy and that, that being so, the rule must be applied pragmatically and flexibly, rather than rigidly and automatically. If so, it is difficult to see why there should not be room for a pragmatic and flexible approach to cases in which the claim is directly founded upon a contract which is tainted with illegality, as well as to cases in which it is not. The observations of Nicholls L.J. in  Saunders v. Edwards  [1987] 1 W.L.R. 1116 seem to us to give some support to the view that no clear distinction can be drawn in this respect between the different types of case. The same might, we think, be said of the summary of the law set out by Kerr L.J. in  Euro-Diam Ltd. v. Bathurst  [1990] 1 Q.B. 1, 35-36. The position does, however, remain that, as Kerr L.J. said in that case, the rule prima facie applies where a plaintiff seeks to, or is forced to, found his claim on an illegal contract, and the only case in which, so far as we can see, the defence has, so far, not been sustained in such a situation was  Shelley v. Paddock  [1980] Q.B. 348. That was a case in which, undoubtedly, the illegality in which the plaintiff was involved paled into insignificance compared with the outright fraud practised by the defendants. Further, in considering what was said by Lord Denning M.R. in  Shelley v. Paddock,  and its relevance to the present case, it is necessary to bear in mind the equally trenchant observations by the same judge in  Napier v. National Business Agency Ltd.  [1951] 2 All E.R. 264.
In the present case, there is nothing to indicate that the employer bore any greater share of responsibility for the illegality than did the employee; nor is there any evidence of unlawful conduct on his part which could be compared to the fraudulent conduct of the defendants in Shelley v. Paddock  [1980] Q.B. 348. Indeed, the employee seems to have suggested the arrangement which was made in the present case and, although he was innocent of any deliberate illegality, it must be assumed that he did so with some advantage, or purpose, in mind. In these circumstances, we have come to the conclusion that there is nothing in the recent series of decisions to which we have referred which would justify us in treating the present case otherwise than is required by the application of the very clear statements to be found in Napier v. National Business Agency Ltd.  [1951] 2 All E.R. 264 and Miller v. Karlinski,  62 T.L.R. 85, as well as the uniform practice of the appeal tribunal demonstrated by the other cases cited above. It seems to us, therefore, to follow that we must allow the appeal and, in agreement with the view taken by the chairman, dismiss the application. Even if it were open to us to consider whether public policy did require that the ex turpi causa defence should apply in a case such as this, it would be very difficult for us, in the face of the views which have been expressed already in the Court of Appeal, to reach the conclusion that public policy did not require that the contract in the present case should be treated as unenforceable. It may be said that the consequence is that the employee suffers a severe penalty for a minor illegality which cannot, in all probability, have cost the Inland Revenue any significant sum in lost tax: but we agree with the chairman that it is difficult to imagine that the employee did not appreciate that the contractual arrangement which was made did involve some effects on the taxation position, and that it is not necessarily inequitable that persons who seek to take advantage out of the tax system, misguidedly or otherwise, should not be entitled to be treated as if they were employed under a normal contract of employment.”

12.	What, therefore, Salvesen decides is that where an employee has made a positive choice to operate arrangements which have the effect of depriving the Revenue of payment to which it is entitled, contracts giving effect to those arrangements will be unenforceable notwithstanding that the employee may genuinely have believed them to be lawful.  The position might be different where the initiative came from the employer; but those were not the facts in that case.  I note Lord Coulsfield’s comment, agreeing with the Chairman, that “it is difficult to imagine that the employee did not appreciate that the contractual arrangement which was made did involve some effect on the taxation position”; but it is quite clear that that is not part of the ratio, but is simply offered as some comfort that the result was not an inequitable one.  Salvesen appears to have been regarded for the last ten years as a correct statement of the law.  It has been referred to without disapproval (though generally also without argument on the point) in a number of decisions in this Tribunal.  I was referred to Leighton v. Michael [1996] IRLR 67 (a decision of Mummery P., which also referred to Miller v. Karlinski – see at para. 23 (p.69)); G.S. Cannon v. Sadler (EAT/385/01); Kaid v. Gruppo Ltd. (EAT/0546/03); and Grace v. BF Components Ltd.  (EAT/0006/05).

13.	In my view the Chairman in the present case was entirely right to regard the facts of Salvesen as indistinguishable from those in the present case.  Even if the possibility of the Appellant providing her services under an arrangement with GFI was first proposed by the Respondents (which is what the Chairman appears to find, though it might be thought a little surprising), the choice to avail herself of that option was made freely by the Appellant, who was of course - as the Chairman said - an experienced businesswoman.  The arrangements in question had, at least, the effect of deferring the payment of tax to the Revenue: in the absence of firm findings, it would not perhaps be right to find that the ultimate tax recovered would necessarily have been less, though frankly it seems likely that that would have been the case - but that was also the case in Salvesen.  And the Chairman was prepared to proceed - despite his doubts - on the basis that, as in Salvesen, the Appellant had acted in good faith and without appreciating the tax consequences of the arrangements which she had put in place. 

14.	Miss Brown submitted that Salvesen fell to be distinguished because Mr. Simons was unquestionably an employee and it would therefore have been clear if he had taken legal advice that his side-arrangement was unlawful; whereas in the present case, notwithstanding the eventual decision of the Tribunal, it was far less clear that the Appellant’s categorisation as self-employed was wrong.  But even if her premises are correct, which is questionable, Miss Brown’s argument ignores the ratio of Salvesen.  The Employment Appeal Tribunal did not decide the case on the basis that Mr. Simons ought to have known that the arrangement was unlawful but straightforwardly on the basis that he took the initiative to set up an arrangement which was in fact illegal.

15.	The question for me, therefore, is whether I should follow the decision in Salvesen.  Other things being equal, I should of course be very slow to depart from a decision of another division of this Tribunal. However, what Miss Brown submits is that the law has moved on since 1994.  She relies in particular on two decisions of the Court of Appeal - Hall v Woolston Hall Leisure Ltd [2001] ICR 99 and Colen v Cebrian (UK) Ltd [2004] ICR 568.  I must therefore consider what those cases in fact establish.

Hall v. Woolston Hall Leisure Ltd 
16.	Hall was a case in which an Industrial Tribunal had refused to award compensation to an employee who had been dismissed by reason of her pregnancy on the ground that she had acquiesced in an arrangement under which her employer under-declared her true earnings to the Revenue; and that decision was upheld by the Employment Appeal Tribunal.  The Court of Appeal allowed her appeal, essentially on the basis that her mere acquiescence in her employer’s conduct was not enough to attract the defence of illegality.  Although the specific question which fell for decision was how the defence applied to claims under the Sex Discrimination Act 1975, the judgment of Peter Gibson L.J. contained an authoritative review of the doctrine in the light of the most modern authorities (including the decision of the House of Lords in Tinsley v. Milligan [1994] 1 A.C. 340), which goes wider than that particular issue.  At paras. 29-31 (p. 108 C-H) he summarised how the defence applies to contractual claims, identifying three categories of case where the defence is, or may be available, namely:
-	where the contract is entered into with the intention of committing an illegal act
-	where the contract is expressly or implicitly prohibited by statute
-	where a contract, lawful when made, is illegally performed and the party seeking to enforce it knowingly participated in that illegal performance: he emphasised that in this third category “knowledge by itself is not … enough  … [t]here must be knowledge plus participation” (see Ashmore, Benson, Pease & Co Ltd v A V Dawson Ltd  [1973] 1 WLR 828, per Scarman LJ, at p 836).  

17.	Peter Gibson L.J. proceeded to show that that test of “knowledge plus participation” had been adopted in cases where employees whose employers had committed frauds on the Revenue brought unfair dismissal claims (see paras. 32-38, at pp. 108-110).  Employees in such cases are, inevitably, making a claim based on the contract of employment, albeit not a contractual claim stricto sensu, but the contract will not (normally) have been entered into for an illegal purpose so that the contract was unlawful when made: the fraud on the Revenue will have occurred by way of illegal performance, so that the case requires consideration in accordance with the principles applicable to the third category.

18.	In the course of his review of the unfair dismissal cases Peter Gibson LJ reviewed the decsion in Salvesen.  At para. 36 (p. 110 B-C) he said this:

“In  Salvesen v Simons [1994] ICR 409 the Employment Appeal Tribunal had to consider whether the payment, pursuant to an arrangement between employer and employee, of part of the employee's salary without deduction of tax and national insurance contributions rendered a contract illegal and unenforceable with the result that the employee could not pursue a claim for constructive dismissal. The appeal tribunal held that it was unenforceable. Lord Coulsfield, at p 424, said that the ex turpi causa rule, being based on public policy, should be applied pragmatically and fairly, even in cases where the claim was directly founded upon a contract tainted with illegality. But in that case the employee, although innocent of deliberate illegality, had suggested the arrangement which was made, and so it was held that the contract of employment should be treated as unenforceable.”

There is nothing whatever in that passage to suggest that Peter Gibson LJ believed that Salvesen was wrongly decided.  The principal point which he was considering was whether it satisfied the “knowledge plus participation” test, which it plainly did: the employee both knew of, and participated in, the illegal arrangement since he had positively proposed it.  Of course the issue in Salvesen, as in the present case, was rather different, namely what it was that the employee had to “know”: was it enough that he knew of the arrangement, or did he also have to know of its illegality ?  Peter Gibson L.J. did not specifically address that issue - unsurprisingly since this particuar point did not arise on the facts in Hall itself – and I do not therefore think that this passage can be taken as a formal approval of the actual point decided in Salvesen.  But his summary clearly points up the fact that the employee was “innocent of deliberate illegality”, and it is fair to observe that he apparently saw nothing objectionable in the result.  He referred to Salvesen again, briefly, in para. 38 (p. 110H); but only to make again the point that the employee in that case had not only known of the illegal arrangement but participated in it.  

19.	There was also a full judgment from Mance L.J.  He too conducted a wide-ranging review of the authorities on illegality, essentially directed to the question of the degree of “participation” required in order to attract the defence; but neither he nor Moore-Bick J. (who delivered a much shorter judgment) considered Salvesen.  

20.	Miss Brown submitted that the importance of Hall was that it made clear – in a way which had not appeared from the previous case-law – that it was necessary in each case to carry out a careful factual analysis of the degree of knowledge of, and participation in, the illegal arrangement on the part of the employee, an exercise which had not been carried out by the Chairman in the present case.  I agree that in a case where there is a genuine issue as to the employee’s knowledge or participation such an enquiry is indeed necessary, though I am not sure that it is right to say that it is only since Hall that this has been clear.  But neither Salvesen nor the present case are cases of that type.  There could be no issue that either Mr. Simons in Salvesen or the Appellant in the present case knew about the arrangements in question and “participated” in them: they had indeed positively chosen them.  The only question is whether they appreciated that they were illegal; and that is a different question, on which Hall has nothing to say – or certainly nothing which assists the Appellant.  

Colen v. Cebrian (UK) Ltd.
21.	This was an unfair dismissal claim brought by two employees who were husband and wife.  Both were paid commission by their employer.  The Employment Tribunal found that the commission was in fact only earned by the husband and that the payment of part of the sum to the wife was intended to defraud the Revenue; and that accordingly the claim should be dismissed on grounds of illegality.  The Employment Appeal Tribunal allowed their appeal.  The Court of Appeal dismissed the employer’s appeal.  The dispositive issue was whether the Tribunal had been right to find that the commission was only earned by the husband.  The Court of Appeal held that it had not, with the result that there was no question of illegality.  Accordingly the issue of whether an employee has to know that an arrangement in which he or she participates is unlawful before the defence can be invoked did not arise.  Carnwath LJ referred briefly to Salvesen – see para. 43 (p. 582A) – but only to distinguish it on that basis.

22.	Again, therefore, I can see nothing in Colen that would lead me not to follow Salvesen.    

Conclusion on the Unfair Dismissal Claim
23.	For the reasons given, I am unpersuaded that Salvesen has been shown to be wrong by either Hall or Colen.  It remains of course the case that it is not strictly binding on me; and it is open to me to refuse to follow it if I were satisfied that it was wrong in principle.  By the end of the oral argument that had indeed become the burden of Miss Brown’s submissions.  What, in essence, she was arguing was that since the ex turpi causa rule represented a broad principle of justice it could not be right to apply it in cases where the party in question was not – or, more accurately in the present case, had not been shown to be – morally culpable.  I do not accept that submission, for essentially, three reasons:
(1)	Although I am not bound by the decision in Salvesen, I should in accordance with the usual practice in this Tribunal follow it unless I were sure it was wrong.  While I can of course see the attraction of Miss Brown’s broad submission, I am far from sure that Salvesen is wrongly decided.  Quite apart from the question of whether Salvesen itself was merely following Miller v. Karlinski (as to which see (2) below), there are respectable arguments that public policy requires a strict approach in cases of this character (see (3) below).   
(2)	It is, at the least, strongly arguable that as regards the issue of principle which it decided the Employment Appeal Tribunal in Salvesen was simply following Miller v. Karlinski – by which, as a decision of the Court of Appeal, I am unquestionably bound.  On a strict application of the doctrine of precedent, it is indeed hard to escape that conclusion.  Du Parcq L.J.’s statement quoted at para. 10 above is pretty unequivocal.  Miss Brown attempted to distinguish Miller on the basis that the illegal arrangements in that case involved actual misrepresentations of fact to the Revenue, i.e. the representations that the payments in question were in respect of expenses, but I doubt if that difference can found any distinction of principle given that Du Parcq L.J. proceeded, however sceptically, on the basis that the misrepresentations in question were innocent.  The real point about Miller may be that it is (at least as reported) so shortly reasoned that it cannot safely be taken as expressing a principle of general application, or in any event one which can be accepted without qualification in the light of the plethora of more recent case-law.  But it would easier for the Court of Appeal than for me to seek to escape it on that basis.    
(3)	Although it may at first seem harsh that claimants may be deprived of entitlement to substantive relief on account of arrangements which they entered into in good faith, that result does not seem to me unacceptably unjust.  The situation with which we are here concerned will only arise where employees have knowingly participated (which, as the cases show, involves some active choice on their part) in non-standard arrangements of one kind or another – in Miller v. Karlinski the artificial characterisation as “expenses” of payments which were known to be no such thing; in Salvesen the routing of part of the employee’s remuneration though his partnership; in the present case the Appellant’s choice to have her services supplied through a wholly-owned company.  In the great majority of cases they will of course be doing so wholly or partly because of perceived tax advantages, and they must take the risk that if the route taken to achieve those advantages is found to be illegitimate they will suffer the consequences.  But even where – surprisingly – they can show that they were not seeking such advantages I see nothing objectionable in the law taking the view that workers who actively choose to employ sophisticated arrangements of this kind must take the consequences of their actions, whether they appreciated those consequences or not.  This is, I think, the point being made by Lord Coulsfield at the end of the final paragraph of his judgment in Salvesen.  A more tolerant line on the part of the Courts might perhaps permit a fairer outcome in a few cases (though I suspect a very few); but that would be at the price of requiring in every case an enquiry into the details of the claimant’s knowledge, advice and state of mind – a notoriously slippery enquiry.  

24.	I accordingly dismiss this appeal as regards the unfair dismissal claim.  I do so without regret.  It should certainly not be assumed that the view of the law taken by the Chairman deprived the Appellant of what would otherwise have been an established right to claim for unfair dismissal: he made it clear that he was unimpressed by her evidence, and if he had proceeded to a finding on what her understanding was it is far from clear that it would have been favourable to her.  But even if she was indeed genuinely unaware that in supplying her services through GFI she might be gaining an illegitimate tax advantage, her position is still unattractive inasmuch as she is seeking now to assert that she was an employee of the Respondents during a period in which she deliberately chose to work on a basis which was incompatible with employee status.  The Chairman has held that she was nevertheless in law an employee during that period; but since that was despite, rather than in accordance with, her own intentions no injustice is done if by another route she remans unable to claim compensation for unfair dismissal. 

NOTICE PAY
25.	The position in regard to the “notice pay” claim is totally different.  The notice of which, if her claim is well-founded, the Appellant was wrongfully deprived was due to her under the employment contract which she entered into in April 2005.  That contract was not tainted by illegality in any way, and the Appellant had no need to rely on anything done in respect of the period January-April 2005.  It seems to me that the Chairman was plainly wrong to dismiss the claim on the basis that he did.  The claim will have to be remitted to the Employment Tribunal for a decision on the merits.  Mr. O’Dempsey did not seek to contend otherwise.