Type: Client Alerts
The summer sun has not slowed the pace of important decisions and legislative updates for employers to be aware of. Summarised below are three of the most notable.
Payments to continuing employees in settlement of claims may be subject to tax It is widely understood that payments of up to £30,000, made in settlement of certain claims, may be paid on a tax-free basis. However, a recent determination by the Tax Tribunal serves as a reminder that this is not a rule without exception and careful consideration should be given to the tax treatment of any such payments made to continuing employees.
The Tax Tribunal’s decision relates to a case where the employer had required an employee to work from a new location and the employee had alleged breach of contract in response. To resolve matters, the parties entered into a settlement agreement, under which the employee received £30,000 tax free. The employee then worked from the new location. Before the Tax Tribunal, it was argued that the employee had received the £30,000 payment in return for not pursing a claim for breach of contract. However, the Tribunal was not persuaded by this. Instead, it found that the payment was consideration for accepting a change in the terms, and, therefore, taxable as earnings.
Employers should be mindful of this risk and take steps to mitigate their exposure before agreeing to make tax-free settlement payments to continuing employees.
Failures to commence collective redundancy consultation at the earliest stage may result in orders to pay each employee up to 90 days’ pay A recent case has highlighted how crucial it is to commence collective consultation as soon as a provisional decision is made that could lead to 20 or more dismissals.
The provisional decision of an educational foundation to close a school if pupil numbers did not increase within two months was found to have triggered the collective consultation obligations. As the employer did not take any steps towards consultation when that provisional decision was made, it was found to be in breach of its obligations and was ordered to pay each of its employees an amount equal to 90 days’ actual pay.
In its defence, the employer explained that the likely effect of it commencing collective consultation at the time of the provisional decision would have been to deter any new pupils from joining and, therefore, seal the fate of both the school and everyone who worked there. However, the Tribunal was unsympathetic to this point and reiterated the importance of complying with collective consultation obligations as soon as they are triggered.
Employers facing a similar situation should consider their options very carefully and be aware that no decisions, provisional or otherwise, should be made until the employer is ready to comply with collective consultation obligations.
Two-year backdating limit on holiday pay claims has begun As a result of employer concern regarding the implications of recent holiday pay cases, which confirmed that many employers had been incorrectly under-calculating holiday entitlements (e.g. non-guaranteed overtime should be taken into account when calculating holiday pay), a new limitation period of two years has been introduced for such claims.
This limitation period applies to claims made by employees on or after 1 July 2015. Interestingly, the limitation period also applies to many other types of deductions claims (other than just claims for holiday pay) e.g. claims for regular salary, bonuses, commissions, etc. Of course, the limitation period does not have any retroactive effect and claims brought before 1 July 2015 are unaffected.
Client Alert 2015-210