There is an exemption from income tax in respect of certain awards for the breach of an employee’s rights. This would cover an award for a successful claim by an employee under the heading of, for example discrimination or harassment.
However, the exemption does not apply to awards in respect of remuneration, for example an award of holiday pay or arrears of pay.
So, let’s take a look and get a good handle on payments arising from employment law claims that are exempt from income tax and those that are not.
Before we do, though, let me make this point as plain as a pikestaff: this is a complex area. If you are involved in any of the scenarios discussed in this piece, either as an employee or employer, get advice from a tax professional.
Payments exempt from income tax
The exemption applies to
- payments for claims made under a “relevant act” on foot of a decision or recommendation of a “relevant authority” and
- Subject to certain conditions, “out of court” settlement payments arising out of claims under a “relevant act”.
What’s a relevant act?
A “relevant act” includes the following acts:
- Employment Equality Act, 1998
- Maternity Protection Act, 1994
- Parental Leave Act, 1998
- Payment of Wages Act, 1991
- Terms of Employment Information Acts, 1994 and 2001
- Minimum Notice & Terms of Employment Acts, 1973 – 2001
- Protection of Young Persons (Employment) Act, 1996
- Protection of Employees (Part-Time Work) Act, 2001
- Protection of Employees (Fixed-Term Work) Act, 2003
- Redundancy Payments Acts, 1967 – 2003
- Organisation of Working Time Act, 1997
- Carers Act, 2001
Generally, it is an act containing provisions for the protection of an employee’s rights/entitlements.
A “relevant authority” is
- The WRC (Workplace Relations Commission)
- The Labour Court
Payments not exempt from income tax
The tax exemption does not apply to
- payments in respect of remuneration or arrears of remuneration
- the termination of employment, for example a successful claim for unfair dismissal (there are some reliefs for termination due to redundancy and retirement)
- compensation for a reduction in income or future reduction in income due to restructure/reorganisation, change in work methods, change in location
“Out of court” settlements may qualify for an exemption if certain conditions are met. These conditions include
- the settlement agreement is in writing
- the agreement is not between connected persons
- the claim would have been a bona fide claim under a relevant act if it was made to a relevant authority
- the claim was likely to be successful if put in front of the relevant authority
- the amount does not exceed the maximum amount that could have been awarded if it was decided upon by a relevant authority.
For more information and examples refer to the Revenue Commissioners website.
Here is a useful guide from Standard Life which sets out the position in relation to termination payments and ex-gratia termination payments.
This is a complex area.
If you are an employer or employee involved in an employment case you should be crystal clear about the tax implications of any award or settlement arising from an employment related claim or dispute.
Let me make this clear as a bell: you should obtain professional advice from a qualified tax consultant.
Unless you want the Revenue Commissioners to come knocking on your door and landing you with an unexpected tax bill.