Employees exiting employment and issued with a settlement agreement should be aware of the changes to law on 6th April 2018 due to new employment legislation coming into force.
A major change to the rules on taxation of termination payments comes into force on 6th April 2018 which means that all payments in lieu of notice are taxable.
It is imperative that employees are aware of this when considering an exit/severance package proposal from their employer or negotiating the terms of a settlement.
All payments in lieu, whether contractual or not, will be taxable and the £30,000.00 exemption does not apply to any payments in lieu of notice.
Whether or not a payment in lieu of notice (PILON) is taxable has traditionally been dependent on the terms of the employee’s contract of employment. Historically, the position to date has been:
a) if there is no express PILON, but the employer by custom and practice pays in lieu, a PILON has been implied and is deemed taxable; or
b) if there has been no express clause and no chance of a clause being implied, the payment has been regarded as compensation for breach of contract and the first £30,000.00 tax-free.
In practice and from our experience, it is commonplace for employers to offer employees a global severance payment with a settlement agreement and to provide limited explanation as to the calculation of it and the taxable status of payments. The result can be that some employees agree a “deal” that may not actually be of the true value they believed it to be and they can be very disappointed when advised its much less that they expected and at what can sometimes be a very unsettling and uncertain period for them.
Settlement Agreements used to be called Compromise Agreements. Once legally complete a settlement agreement is a legal contract between an Employer and an Employee enforceable by both parties. The agreement documents and agrees the termination of an Employee from employment with an Employer. Such agreements are usually confidential.
Settlement (compromise) agreements can arise from a number of situations including compulsory or voluntary redundancy situations; variations to contracts of employment; disputes at work; grievances and disciplinaries and sickness absences; ill-health retirements; and where an Employee faces allegations of poor performance or misconduct.
A Settlement Agreement generally includes a termination date (the date an employee departs a company), particular payments to an employee, a reference and confidentiality. An agreement requires an Employee to accept particular terms in return for waiving his or her rights to bring complaints, claims or rights of action against the Employer, its directors, officers and employees. It therefore seeks to remove the risk of potential claims and defence costs for an Employer.
For a Settlement Agreement to be valid an Employee must take independent legal advice on the terms and effect of a Settlement Agreement and certification that this has been provided by an independent legal adviser has to form part of the agreement. For these reasons, Employers usually provide a contribution to an Employee’s legal fees.
Farleys Solicitors LLP specialise in a wide range of employment law matters for employees including settlement agreements, termination payments, settlement negotiations, redundancies, disputes at work and Employment Tribunal claims and representation.
If you require any assistance with any of the above please contact Farleys Employment Law & HR team on 0845 287 0939 or submit your enquiry online.
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