Contract of employment - sales commission split and paid to husband and wife separately to avoid tax - contract not tainted with illegality

Colen and another v Cebrian (UK) Ltd: CA: (Lord Justice Peter Gibson, Lord Justice Waller and Lord Justice Carnwath): 20 November 2003

The employees, husband and wife, were the minority shareholders and the managing director and director of the defendant company, earning salaries and commission for their service.

In 1988, the commission structure was changed so the company agreed to pay the husband 10% commission on his sales.

The wife accompanied the husband on his sales calls and was involved in administrative and clerical work, without any written agreement with the company, and was paid a fraction of the husband's sales commission at varying rates from time to time to save tax on the total commission earned.

In 1995 they left the company following deterioration of relationship with other shareholders and brought claims for unpaid commission and damages for unlawful and unfair dismissal.

The employment tribunal dismissed their claim, holding that the payment of commission to the wife on the contract with the husband was tainted with illegality by reason of an intention to defraud the Inland Revenue; the Employment Appeal Tribunal allowed the employees' appeal.

The company appealed.

James Laddie (instructed by Hacking Ashton, Newcastle under Lyme) for the company; Jennifer Eady (instructed by Knight & Sons, Newcastle under Lyme) for the employees.

Held, dismissing the appeal, that a contract which was lawful when it was made would not necessarily become unlawful by any incidental act of illegality in the performance of it if the person seeking to enforce the contract did not have to rely on any conduct of illegality; and that where the husband and wife worked as a team the payment of split commission with the object of saving the tax on the total earning of the commission did not, without more, constitute a fraud on the Inland Revenue.