Categories
Payment of Wages

€65,000 Termination Payment to Employee Not Exempt from Tax-Tax Appeals Commission Decides

Imagine this.

You receive €65,000 on the termination of your employment, and you believe it is tax free. Then, the Revenue Commissioners come calling and they claim the payment is taxable.

And they decide that, yes, it is taxable and raise an estimate for the taxation.

Lately, I have a lot of employees coming to me with settlement or termination of employment agreements. These agreements do a number of things, the most important of which is the termination of the employment.

The employee is looking to have the agreement “looked over” and to be advised that all is in order. From my perspective this is unproblematic.

However, one of the trickiest parts of these agreements, and a potential landmine for the employee, is the tax situation and the tax treatment of the settlement payment.

Invariably the employee will be getting holiday pay and notice pay, and by reason of the fact that this is pay it is fully taxable.

Any statutory redundancy payment is tax free but it gets more complicated when there is an ex gratia (discretionary) payment involved. This is taxable but there may be an exemption for the employee.

Please note I am a lawyer, not a tax expert. In fact, if truth be told, my knowledge of taxation is limited and basic.

But I know enough to warn the employee to get taxation advice if there is a significant payment involved. A recent Tax Appeals Commission decision in December 2019 proves the wisdom of this approach.

Background

The employee received a termination payment of €65,000 and the severance agreement provided, under section 4 “Taxation Indemnity” for the employer as follows:

“The Company gives no warranty as to the amount of tax or pay related social insurance contributions that may be chargeable by reason of the Termination Payment and other arrangements set out in this Agreement.”

The agreement also provided for a contribution to the employee’s legal costs in the sum of €10,000.00.

The Revenue Commissioners claimed the termination payment was taxable and the dispute ended up with the Tax Appeals Commission.

The Law

Section 192A of the Taxes Consolidation Act, 1997 provides:

“192A Exemption in respect of certain payments under employment law (1) In this section “relevant Act” means an enactment which contains provisions for the protection of employees’ rights and entitlements or for the obligations of employers towards their employees;

“relevant authority” means any of the following –

(a) a rights commissioner,

(b) the Director of the Equality Tribunal,

(ba) an adjudication officer of the Workplace Relations Commission,

(bb) the Workplace Relations Commission,

(bc) the District Court,

(c) the Employment Appeals Tribunal,

(d) the Labour Court,

(e) the Circuit Court, or

(f) the High Court.

(2) Subject to subsections (3) and (5), this section applies to a payment under a relevant Act, to an employee or former employee by his or her employer or former employer, as the case may be, which is made, on or after 4 February 2004, in accordance with a recommendation, decision or a determination by a relevant authority in accordance with the provisions of that Act.

(3) A payment made in accordance with a settlement arrived at under a mediation process provided for in a relevant Act shall be treated as if it had been made in accordance with a recommendation, decision or determination under that Act of a relevant authority.

(4) (a) Subject to subsection (5) and without prejudice to any of the terms or conditions of an agreement referred to in this subsection, this section shall apply to a payment –

(i) made, on or after 4 February 2004, under an agreement evidenced in writing, being an agreement between persons who are not connected with each other (within the meaning of section 10), in settlement of a claim which–

(I) had it been made to a relevant authority, would have been a bona fide claim made under the provisions of a relevant Act,

(II) is evidenced in writing, and

(III) had the claim not been settled by agreement, is likely to have been the subject of a recommendation, decision or determination under that Act by a relevant authority that a payment be made to the person making the claim,

(ii) the amount of which does not exceed the maximum payment which, in accordance with a decision or determination by a relevant authority (other than the Circuit Court or the High Court) under the relevant Act, could have been made under that Act in relation to the claim, had the claim not been settled by agreement, and

(iii) where –

(I) copies of the agreement and the statement of claim are kept and retained by the employer, by or on behalf of whom the payment was made, for a period of six years from the day on which the payment was made, and

(II) the employer has made copies of the agreement and the statement of claim available to an officer of the Revenue Commissioners where the officer has requested the employer to make those copies available to him or her.

(b) (i) On being so requested by an officer of the Revenue Commissioners, an employer shall make available to the officer all copies of –

(I) such agreements as are referred to in paragraph (a) entered into by or on behalf of the employer, and

(II) the statements of claim related to those agreements kept and retained by the employer in accordance with subparagraph (iii) of that paragraph.

(ii) The officer may examine and take extracts from or copies of any documents made available to him or her under this subsection.

(5) This section shall not apply to so much of a payment under a relevant Act or an agreement referred to in subsection (4) as is–

(a) a payment, however described, in respect of remuneration including arrears of remuneration, or

(b) a payment referred to in section 123(1) or 480(2)(a).

(5A) This section shall not apply to payments made pursuant to an order under section 2B of the Employment Permits Act 2003.

(6) Payments to which this section applies shall be exempt from income tax and shall not be reckoned in computing total income from the purposes of the Income Tax Acts.”

Section 123 of the Taxes Consolidation Act, 1997 provides:

“123 General tax treatment of payments on retirements or removal from office or employment

(1) This section shall apply to any payment (not otherwise chargeable to income tax) which is made, whether in pursuance of any legal obligation or not, either directly or indirectly in consideration or in consequence of, or otherwise in connection with, the termination of the holding of an office or employment or any change in its functions or emoluments, including any payment in commutation of annual or periodic payments (whether chargeable to tax or not) which would otherwise have been so made.

(2) Subject to section 201, income tax shall be charged under Schedule E in respect of any payment to which this section applies made to the holder or past holder of any office or employment, or to his or her executors or administrators, whether made by the person under whom he or she holds or held the office or employment or by any other person.

(3) For the purposes of this section and section 201, any payment made to the spouse, civil partner, or any relative or dependant of a person who holds or has held an office or employment, or made on behalf of or to the order of that person, shall be treated as made to that person, and any valuable consideration other than money shall be treated as a payment of money equal to the value of that consideration at the date when it is given.

(4) Any payment chargeable to tax by virtue of this section shall be treated as income received on the following date –

(a) in the case of a payment in commutation of annual or other periodical payments, the date on which the commutation is effected,

and

(b) in the case of any other payment, the date of the termination or change in respect of which the payment is made, and shall be treated as emoluments of the holder or past holder of the office or employment assessable to income tax under Schedule E.

(5) In the case of the death of any person who if he or she had not died would have been chargeable to tax in respect of any such payment, the tax which would have been so chargeable shall be assessed and charged on his or her executors or administrators, and shall be a debt due from and payable out of his or her estate.

(6) Where any payment chargeable to tax under this section is made to any person in any year of assessment, it shall be the duty of the person by whom that payment is made to deliver particulars of the payment in writing to the inspector not later than 14 days after the end of that year.”

The Arguments

The employee claimed the termination payment was not taxable because he had made an allegation of bullying in the workplace, an investigation had been carried out by an external investigator who did not uphold the allegation, mediation was then availed of to resolve the dispute, but the employee saw during the mediation that there was no future for him in the workplace. In consequence of this his solicitor contacted the employer and the settlement agreement was agreed between the parties.

The Revenue Commissioners argued that this mediation was not sufficient to allow the tax exemption as such mediation did not meet the requirements of Section 192A of the Taxes Consolidation Act, 1997 as it was not a mediation process provided for in a relevant act.

Revenue also argued that it could not come within the “out of court” settlement because it was not presented to any court for a decision and therefore did not qualify.

Revenue also argued that the fact that the agreement was described as a “severance agreement” indicated it was not a payment which could avail of the tax exemption.

The Decision

The Tax Appeals Commissioner decided that the first place to look when determining a case like this was the agreement itself.

“The Severance Agreement expresses in clear terms that the Appellant was being given notice of the termination of his employment and that his employer agreed to make a termination payment to the Appellant. The payment of €65,000 is described as a termination payment. The Appellant agreed to accept the payment without any admission of a breach of statute or law by either party or a breach of any duty or obligation by the employer to the Appellant, and in full and final settlement of any claims arising out of the Appellant’s employment with the employer.”

The Commissioner went on to hold that the agreement confirmed there was no reference to the payment being made by the employer for a breach of the employment rights of the employee arising from the bullying compliant.

The employee accepted the payment without any admission of liability on behalf of the employer and this was expressly acknowledge in the agreement.

Moreover, of the payment was made in consequence of mediation pursuant to a “relevant act” it may be exempt. But that was not the case here as the mediation was voluntary and agreed between the parties.

Furthermore, an exemption would be possible if the payment was to settle a claim under a relevant act and the claim was likely to have been subject of a determination by a relevant authority. This means it must be advanced to a point where there is a “real prospect that the matter will be present to a court for decision”. This was not the case here.

For all these reasons the Appeal Commissioner, Fiona McLafferty, determined that the payment paid under the Severance Agreement was not exempt from tax.

Read the full decision here.

Categories
Employment Claims The Employment Contract

Employment Termination Agreements-the 1 Big Decision for the Employee

employment termination agreement

Employment termination agreement, severance agreement, compromise agreement, waiver agreement, settlement agreement.

It has many names but it amounts to the same thing.

The employment is being terminated and the employee is being asked to sign some type of agreement and enter into another contract with the employer.

I see a lot of these agreements on a frequent basis in my office, especially now with the Covid 19 pandemic and the move by employers to carry out redundancies and cut costs.

What is involved in this type of agreement?

What is the big decision the employee has to make?

These are the questions I will address in this piece. Let’s take a look, shall we.

What’s in the agreement?

The agreement itself will almost certainly be a standard agreement which will be adapted for the particular employee and the package being offered; but the same types of matters are dealt with in all these sorts of agreements.

The following will be included:

  • The parties
  • Definitions of words and phrases in the agreement
  • Termination of the employment
  • The termination payment, and other payments
  • The tax treatment
  • Legal advice-provision for the employee to get legal advice regarding the agreement, and provision for payment by the employer of the legal costs of obtaining the advice
  • Pension (if any)
  • Health insurance (if any)
  • Outplacement services (if any)
  • Return of company property
  • Release and settlement of any issues or claims arising from the employment
  • Confidentiality
  • Secrecy
  • Non disparagement by the parties
  • Reference or statement of employment
  • Binding agreement
  • Applicable law-Irish law

The proposed settlement/severance agreement will me marked “without prejudice/subject to contract” until executed and witnessed by both parties.

The big question

So, now that you know what is usually contained in these agreements what is the big decision for the employee, particularly in a redundancy situation?

Let’s take a look at a redundancy, although the same type of logic and decision making will need to be applied in other termination circumstances.

The employee is going to be offered a payment by the employer, in return for which the employee is going to sign this agreement and waive all her rights to bring any claim arising from the employment.

The agreement will make provision for the payment of a statutory redundancy payment, to which you are legally entitled, and the payment of an “ex gratia” payment, which is at the discretion of the employer.

The employee may believe, for example, that a) it is not a genuine redundancy or b) she is being unfairly selected. If that is the case and she wishes to pursue the matter at the WRC (Workplace Relations Commission) she will be bringing a case for unfair dismissal. If she wishes to do so, however, she will be refusing to sign the agreement and passing up any “ex gratia” payment proposed by the employer.

If the employee signs, she gets both payments. If she refuses to sign she is still made redundant but only gets the statutory redundancy payment.

This decision needs to be considered carefully.

Yes, he might win at the WRC, but if he does will he win more than he has foregone by refusing to sign the agreement? Is he prepared to wait the 6 months for a hearing, and then pay for the legal costs of representation?

If it is an unfair dismissal claim the employee may win reinstatement or reengagement, but this is unlikely and the relationship between the employer and employee may be strained or broken.

On the other hand if the employee was to win a claim for discrimination he could be awarded up to two years’ salary. So, each case must be looked at on its particular facts and circumstances.

These are the factors the employee must consider when making the big decision to sign or refuse to sign the agreement.

But the bottom line is simple.

On the one hand the employee is being offered a payment to leave the employment quietly and with no fuss; in return he is giving up his rights to bring any claims in the future arising from the employment.

Conclusion

The employee needs to get legal, and probably taxation, advice about any termination agreement he is being asked to sign. Because once she signs the agreement it is probably going to be effective in doing its job to prevent the employee from bringing any further claims against the employer.

There is a straightforward cost/benefit, risk/reward analysis to be done by the employee when it comes to sign or not sign such an agreement.

Want to roll the dice and put all your chips on red/black? This is the stark decision you face. Weigh it up carefully. If you do sign it will probably bind y0u.

Here is a recent example of one such case where the employee signed an agreement but later claimed it was only signed under duress. The WRC did not accept this and held the agreement was effective and binding on the parties.

Categories
Employment Claims

Employment termination agreements-how effective are they?

Employment termination agreement

The use of a settlement or compromise agreement in the termination of an employee’s employment is something I deal with frequently.

There is a wide range of reasons why the employment is being ceased, ranging from redundancy to difficulties in the employment relationship to allegations of misconduct to allegations of bullying, discrimination, harassment, and so on.

Often the parties will look at the advantages and disadvantages of getting into a full blown dispute, either in Court or at the WRC or Labour Court, and decide that a “negotiated exit” from the employment might be the best option for both employer and employee. This way means that matters are settled confidentially and both parties avoid the prospect of a costly legal battle that could go either way. The employer may also avoid the cost of an investigation and disciplinary hearing in the workplace, something that can be disruptive, divisive, and expensive.

The employee might also, as part of the settlement deal, negotiate a satisfactory reference or, at a minimum, a neutral “statement of employment” which will not adversely affect their future career prospects.

All correspondence up to the signing of such agreements will be on a “without prejudice” basis, just in case the negotiations break down. If the talks do fail then none of the preceding correspondence can be used in evidence later at a hearing between the parties.

The central purpose of such agreements can be boiled down to an essence whereby the employer pays a termination payment to the employee in return for the employee signing an agreement in which she will waive all her rights to bring any further claims against the employer arising from the employment. Both sides avoid a messy conflict with an uncertain outcome and move on with their lives.

Both sides have certainty and in business or life or in one’s career there is a lot to be said for this.

How effective are settlement agreements?

How effective are these agreements? Can the employee come back for another bite of the cherry?

All these agreements will contain a clause confirming the employee has obtained independent legal advice about the agreement or will sign the agreement waiving their right to obtain such advice.

That does not mean that an employee will not later attempt to bring a claim against the employer, notwithstanding the signed agreement. Generally, but not always, such agreements are effective and do what the employer wants them to do: prevent any future claims.

In a WRC case (ADJ-00020068) from January 2020 an employee attempted to have another nibble in circumstances where he had signed a settlement agreement. The employee argued that he did not have knowledge of the Irish legal system and attempted to have the agreement set aside.

The agreement contained the usual clause to the effect that it was an agreement “in full and final settlement, satisfaction, release and discharge of any and all claims … arising out of the employee’s employment or termination of his employment”

The adjudicator declined to hear the case as a consequence.

In like fashion the Labour Court had a similar case in Higgins v Dept. of Foreign Affairs, UDD 1969. The employee had signed a settlement agreement releasing the employer from all liability, damages or causes of action, whether known or unknown, relating to [her] employment … or the termination of that employment, or any other acts or events.

The employee had obtained professional legal advice and the Labour Court held the agreement was effective and dismissed the case.

Effective settlement agreements

An effective settlement agreement will almost certainly be one in which the employee confirms she has had legal advice and there will be confirmation from a solicitor that he has advised the employee regarding the agreement.

It may be sufficient that the employee waives his right to get independent legal advice but I, if I was advising the employer, would warn the employer about the dangers of accepting this and would advise against it.

Moreover, I have seen cases where the advice of an experienced trade union advisor has been held to be effective and binding, notwithstanding the absence of legal training or qualification.

You need to be careful, too, that all of the acts and potential claims that are being waived should be listed in the agreement, with no omissions. For example, if the agreement only refers to claims arising from statute but does not make reference to common law or tort or contract may leave the employer  susceptible to attack on an unanticipated front.