Veitch Penny LLP - Exeter | Crediton, Devon

Case

Colen & Another v Cebrian (UK) Ltd
Court of Appeal - (20 November 2003)

Issues

(1) Contracts of Employment
(2) Illegality
(3) Unfair dismissal

Facts

Manolo and Ann Colen were a married couple employed by the Respondent Company. They also had a 24% share holding in the Company. In order to be paid in a tax efficient way they were paid a low basic salary plus a commission on sales allocated between them.

There was a breakdown in the relationship between the shareholders which ultimately led to their dismissal.

The Colen’s made complaints of unfair dismissal and wrongful dismissal at the Employment Tribunal. They also claimed unpaid commission. The Tribunal proceedings were paused pending the conclusions of other actions in the High Court which were eventually found in favour of the Colen’s.

Once the proceedings recommenced, the employer admitted liability and the proceedings continued on the basis of remedies only. An issue was raised by the employers as to whether the contracts were tainted with illegality due to the way the commission had been allocated, which they suggested amounted to a fraud on the Inland Revenue.

The employers argued that under her contract Mrs Colen was not entitled to any commission whatsoever. Mr Colen was entitled to 10% and had decided to “divest some of his rightful income and give it to his wife in order to evade paying tax.”

At first instance, the Employment Tribunal found in favour of the employer. The Tribunal felt that the burden of proof was on the employees to satisfy the Tribunal on the balance of probabilities that Mrs Colen was legally and contractually entitled to commission, and that they had failed to do so. As a result the contracts were found to be tainted with illegality because of the fraud. Consequently their claims were dismissed.

The employees appealed to the Employment Appeal Tribunal. On appeal, the employer’s position was not accepted and allowed the appeal. The matter was then appealed to the Court of Appeal.

Decision

The Court of Appeal dismissed the Appeal.

They found that the Employment Tribunal had been wrong to find the Contracts were illegal (because of their tax efficient sharing arrangements) and in dismissing the employees’ claims. The Tribunal had been wrong to find that Mrs Colen had no right to commission and that the arrangement was to evade tax. The Court of Appeal supported the decision of the Employment Appeal Tribunal finding that the evidence did not support the employers’ earlier contentions.

In this case it was found that the Employment Tribunal had failed to distinguish between:-

1. A Contract made between the employer and the employees under which commission was to be paid jointly with the sole motivation of defrauding the Inland Revenue because in reality the commission belonged to Mr Colen alone (an illegal Contract).

2. A Contract with Mr Colen alone but performed by payment to his wife with the intention of defrauding the Revenue (which would be a Contract rendered illegal by the performance and the participation in the performance).

3. A Contract under which both Applicants were jointly entitled to commission for work done but which when the question of payment came to be considered they have been paid with tax efficiency and mind.

In this last case, some illegality in the performance may be demonstrated if it could be shown that the split of commission did not relate to each of the employees’ participation in the business of the company and had the effect of cheating the Revenue. Even then for the employers to be able to resist a claim on this basis, the onus would be on them to demonstrate that the act was such to turn the valid Contract into an illegal Contract or to show that the Applicants needed to rely on their illegality in order to succeed in their claim.

Comments

On the evidence before the Tribunal the Court of Appeal concluded there was no evidence to show that the receipt of the commission did not reflect their joint efforts in the business despite tax considerations being taken into account. Accordingly the Employment Tribunal had jurisdiction to deal with the claims and should have done so at first instance.