 Andrew EganAndrew Egan, an employment lawyer with solicitors, Charles Lucas & Marshall highlights the points to consider before employers and employees enter into a compromise agreement.
Compromise agreements are common in today’s fast moving employment sector.
The purpose and effect of a compromise agreement is for an employee to forego his or her rights to bring claims against the employer, and, in exchange for the employee giving up those potential claims, the employer will normally pay compensation to the employee.
Any compromise agreement must meet certain key requirements:
- It must be in writing
- It must relate to particular proceedings. A general release of all claims clause is insufficient and unenforceable.
- The employee must have received independent legal advice as to the terms and effect of the agreement.
- The adviser must have professional indemnity insurance cover and be identified in the agreement.
- The agreement must state that the conditions of the Employment Rights Act 1996 have been met
The tax implications of such agreements are not always easily understood, for example:
- The first £30,000 of any compensation payment can be paid free of deductions for tax and National Insurance. This can include statutory and enhanced redundancy payments, and compensation for loss of employment.
- Benefits in kind are usually taxable except for outplacement counselling (provided the assistance provided is genuinely to help the employee to get another job). However, if a cash allowance is given instead and not linked to the outplacement, then this is not tax free and instead would form part of the termination payment. Also relocation costs and legal costs are generally not taxable. If legal advice expenses are reimbursed, provided that such expenses are incurred in putting in place a compromise agreement, they should be payable free of tax and not count as a taxable benefit.
- If payment is due under the employee’s contract of employment in accordance with a payment in lieu of notice (“PILON”) clause, this will be fully taxable at the time the payment is made. Even if there is no express clause in the contract, such a clause can sometimes be implied into the contract. As such, a payment referable to a notice period may still be taxable, even if there is no express PILON clause in the contract.
- Payments made in consideration of the employee entering into post-termination restrictions will be subject to tax.
Compromise agreements must now be drafted very carefully to be effective and enforceable. It is imperative that employers ensure that these settlement agreements provide the protection they expect.
If you would like more information please contact Andrew Egan on 01793 511055 or andrew.egan@clmlaw.co.uk |
