Performance of Employment Contract ‘Tainted by Illegality’ – Cautionary Tale

There is nothing wrong with an employee being paid in a tax-efficient manner. As an Employment Tribunal (ET) ruling showed, however, where such arrangements stray into the realms of unlawful evasion the consequences are likely to be severe.

The case concerned a commercial director whose bonuses and profit-related pay were in part remitted not to him but to his wife. Following his resignation, he lodged ET proceedings against the company for which he worked, asserting unfair constructive dismissal and unlawful deductions from his wages.

Ruling on a preliminary issue in the case, the ET found that the purpose of diverting part of his remuneration to his wife was plainly to reduce his tax bills. Whether or not he had proposed the payment arrangements, he plainly had knowledge of them and was an active participant in the scheme. On that basis, the ET found that his performance of his employment contract was tainted by illegality.

In those circumstances, the ET concluded that public policy demanded that his unfair dismissal complaint be struck out, together with his claims in respect of notice pay and unpaid bonus and profit-related remuneration. It found, however, that it would be disproportionate to strike out his claims in respect of unpaid basic salary and holiday pay. Those claims were permitted to proceed to a full hearing.

The ET found that the wife had genuinely carried out administrative support work for the husband and that her employment by the company was not a sham. She had no knowledge of the tax evasion that was occurring, nor had she participated in it. All of their earnings ended up in a single joint account and she simply left everything to be sorted out by her husband. On that basis, her claims of constructive unfair dismissal, unlawful deduction from wages and breach of contract were also allowed to proceed.