Employment Tax

Illegality

Produced by Tolley in association with Briony Richards at Charles Russell Speechlys LLP
  • 22 Mar 2022 12:26

The following Employment Tax guidance note Produced by Tolley in association with Briony Richards at Charles Russell Speechlys LLP provides comprehensive and up to date tax information covering:

  • Illegality
  • Introduction
  • Factor-based approach
  • Removing illegal terms
  • Illegality by one party only
  • The effect of illegality
  • Illegality and discrimination
  • Contracting-out provisions
  • Restrictive covenants
  • Confidentiality provisions

Illegality

Introduction

A contract of employment may be (or become) illegal when the contract is expressly prohibited by statute, in which case it cannot be relied upon by either party (‘statutory illegality’). Furthermore, a contract may be unenforceable at common law by the principle of illegality if the contract, or some provision in the contract, has a criminal purpose or requires criminal action (‘common law illegality’).

Common types of illegal contractual terms are:

  1. terms relating to pay which try to evade tax laws (eg by paying cash in hand)

  2. contracts with people who are not legally entitled to work in the UK

  3. contracts to do types of work which are illegal or contrary to public policy, such as prostitution

There are a number of factors that will affect whether a contract is deemed unenforceable by reason of illegality, as set out below.

Factor-based approach

Prior to 2016, any contract tainted by illegality was unenforceable. The rules-based approach sometimes led to injustices and counter-intuitive decisions. In Patel v Mirza, the Supreme Court held that a contract’s illegality should not in itself decide whether or not that contract is enforceable. Instead, courts should consider whether allowing a claim would be harmful to the public interest and the integrity of the legal system by considering three key factors:

  1. whether the purpose of the prohibition that had been broken would be enhanced by denying the claim

  2. whether denying the claim may have an impact on another relevant public policy

  3. whether denying the claim would be a proportionate response to

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