Q. What does the law define as an illegal contract of employment?
A. Illegal contracts of employment are generally:
Those contracts designed to defraud HM Revenue and Customs and the Department of Work and pensions by not paying income tax and/or national insurance contributions.
Contracts mainly for immoral or illegal acts.
Contracts prohibited by law, for example work in breach of immigration rule.
Q. When may an employee have an illegal contract?
A. An employee may have an illegal contract of employment if:
He/she gets all or part of her/his wages cash in hand; and/or
Tax and national insurance contributions are not paid on the wages when they should have been; and
The employee actually knew he/she was being paid in this way to avoid paying tax and/or national insurance contributions, and he/she did nothing about it.
Q. Would a contract of employment still be illegal if only one of the parties (that is the employer or employee) is involved in the fraud?
A. The contract of employment will be legal if only one of the parties is involved in the fraud, for example: where the employee believes that deductions are being made by the employer. If the employee is unaware that income tax is not being paid by the employer, HM Revenue and Customs will usually pursue the employer for any tax due.
Q. What is the effect of an illegal contract?
A. If there is an illegal contract, neither the employer nor the employee will be able to enforce any statutory or contractual, for example an employee cannot claim unfair dismissal, a redundancy payment or right to notice. This is because such claims rely the employee having a legal contract of employment.
Q. If an employee with an illegal contract made a claim to an employment tribunal or county court, what would happen?
A. An employment tribunal or the county court would refuse to hear any claim made an employee if there was an illegal contract in existence. In addition, the papers would be referred to the appropriate authorities, for example, HM Revenue and Customs.
Q. Are there any exceptions to the above rule?
A. An employee may still be able to make a claim of discrimination, as discrimination claims do not rely on a contract of employment existing. In one case, the court of appeal ruled that a complaint of sex discrimination is not based on the contract of employment. It decided that the employee, although aware of the illegal contract, was not colluding with the employer and had been discriminated against.
