Navigating employee departure settlement agreements
We’re hosting seminars in Aberdeen, Edinburgh and Glasgow during May, looking at the practicalities of managing an employee’s departure and settling claims – click each link for more information and to book your place.
At each seminar we will consider:
- Choosing the right termination date, including the options in relation to notice and garden leave;
- Pitching a settlement offer at the right time and appropriate level;
- How to treat benefits such as bonuses, holidays, vehicles and share rights;
- How a settlement package will be taxed and ways to make it more tax effective;
- Other terms to offer, or ask for, as part of a deal;
- Common negotiation scenarios and how to get the best out of them.
In the meantime, here is a look at some FAQs on settling employment claims:
How should a payment in lieu of notice be calculated?
If you are paying in lieu of notice, calculate the amount due in accordance with the terms of the employee’s contract: some will provide for basic salary only; others will include benefits. Check the position as regards any bonus or share options.
Should we make the compensation payment before or after an employee’s P45 is issued?
If you make the payment before the P45, you should deduct PAYE in the usual way. If you make the payment after the P45 is issued, you will need to deduct tax applying the 0T code (on a non-cumulative basis and as if the employee had no personal allowances available). If the entire compensation payment benefits from the £30,000 tax exemption, it will make little difference for income tax purposes whether it is paid before or after the P45. However, if part of it is taxable, the employee may wish to consider whether it will be beneficial for them, based on their circumstances, to receive it either before or after the P45.
What annual leave is an employee entitled to on termination?
An employee will be entitled to any accrued but untaken statutory holiday as at the termination date. Whether they are entitled to any additional accrued but untaken contractual holiday will depend on the terms of their contract.
If an employee has taken holidays in excess of their entitlement, you can only deduct a sum from their final salary payment if you have a right to do so in the employee’s contract or another relevant agreement.
What are the tax implications of imposing new restrictive covenants?
If you want an employee to be subject to restrictions post-termination, review the relevant terms of their contract and decide if these are adequate. If they are, include wording in the settlement agreement to ensure that they survive beyond termination. If you are simply restating what is already in the employment contract, there is no potential tax issue.
If you want to include new or amended restrictive covenants set them out in full in a schedule to the agreement. You will also need to allocate part of the compensation payment to these (and this portion will be taxable).
Can we include a confidentiality clause?
Yes. Although the use of confidentiality clauses has been criticised recently, particularly in relation to sexual harassment claims, the government accepts that confidentiality clauses can play an important role in settlement agreements where they typically prevent the employee (and often the employer) from disclosing information relating to the dispute. This can benefit both parties by facilitating a clean break and encouraging settlement, particularly where there are disputed allegations made by both parties against the other. The government is, however, consulting on introducing new requirements for valid confidentiality clauses (read about the proposals here).
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