tax treatment of settlement payments

In all the time that I have been dealing with employment claims (quite a long time!) there has been a permanent confusion concerning the tax treatment of settlement payments. Should tax be deducted from notice payments? Is there a “payment in lieu” clause in the contract of employment? Should the £30,000 exemption apply? Why should damages be taxed? Almost everyone who deals with employment claims will confront this issue at some point or another and will find people who are adamant that their respective yet conflicting positions are correct.

Now, the Office of Tax Simplification (did you know it existed?) has published a report in which it seeks to resolve these dilemmas once and for all. It has taken a while bearing in mind that it was announced in the Chancellor’s Autumn Statement in 2012. The report recognises that there is a commonly held misconception that all pay-offs fall within the £30,000 tax free exemption and similar misunderstandings concerning which parts of a settlement are tax free. The proposals are summarised as follows:
We believe that payments made in connection with a termination of employment should remain subject to income tax in principle, that certain exemptions should apply, but that these should be designed in a simpler way. We think the simplest way forward is for income tax relief to be only available in circumstances where the employee qualifies for a statutory redundancy payment. We also propose a government review of the existing exemptions, reliefs and reductions for termination payments, in order to establish in each case whether they should be retained as part of the wider reform of income tax and NICs treatment of termination payments.

Under this new relief, we propose that the level of the exemption would be a multiple of the statutory redundancy payment that the relevant individual is entitled to (or alternatively, a flat amount). All payments linked to the termination payment received by the relevant individual (including his/ her statutory redundancy payment) would be aggregated and then the income tax exemption would be applied against the value of these. Subject to this value limit, this relief could extend to any termination payments that he/ she receives – regardless of the nature of the payment.

The proposal would lead to simplification by making it easier to understand the circumstances to which the tax exemption applies (i.e. cases of statutory redundancy). Eligibility would not depend on the terms of the employment contract, as now, which favours the well-advised and can catch people out. Furthermore, there is a recognised statutory definition of redundancy, and a case to suggest that a common approach between employment and tax law is sensible.
But does this really make the tax treatment of settlement payments easier to understand and apply and any fairer?


don’t rely on a court to fix a “defective” restrictive covenant

It is often said that a court, when considering contractual issues, will overlook drafting errors in order to give effect to what the parties intended and therefore make sense of what would otherwise be contradictory or plainly “wrong”. Indeed there are many High Court judgments which clearly apply that approach.

However, it is a dangerous game to assume that a court will always do so, as discovered by Prophet plc, a computer software company.

In Prophet plc v Christopher Huggett the Court of Appeal was asked to consider restrictive covenants in a contract of employment. On first reading the restrictions were fairly unremarkable. Prophet has for a number of years developed, sold and updated computer software for the fresh produce industry. Typically customers were granted 12-month renewable licences to use the software.

Mr Huggett, who had experience in the fresh produce market, was employed on a salary of £50,000 plus commission, with a notice period of three months. His contract included the following:
The Employee shall not during the continuance of this Agreement, or for a period of twelve months from the determination thereof (for whatever reason or in whatsoever manner), without the consent in writing of the Board of Directors of the Company, either solely or jointly with, or as, a Director, Manager, Agent, Consultant or Employee of any other person, firm or company, directly or indirectly, carry on or be engaged, concerned or interested in any business which is similar to, or competes with, any business of the Company in which the Employee shall have worked whilst employed hereunder (in that they provide computer software systems of whatever kind to any company involved in the fresh produce industry) within the geographical area (namely the United Kingdom), except as a shareholder or debenture holder not having a controlling interest in any Company the shares of which are quoted on a recognised Stock Exchange. Provided that this restriction shall only operate to prevent the Employee from being so engaged, employed, concerned or interested in any area and in connection with any products in, or on, which he/she was involved whilst employed hereunder.

The court took the view that the restriction in the long sentence was unenforceable since it was an unreasonable restraint of trade. However, the limitation in the second sentence was clearly designed to make the restriction reasonable. But it didn’t work. Sentence one would provide Prophet with the protection it wanted (but wouldn’t be allowed). However, sentence two, read literally, excluded that protection. The inclusion of the word “and” is critical. As the court observed there is no doubt that it is a true conjunctive. Therefore the condition concerning “products” is operative and, critically, could be taken only as referring to Prophet’s own products. The competitor Mr Huggett wanted to work for unsurprisingly sold their own products rather than Prophet’s products and therefore the clause did not provide the intended protection.

In the High Court it was suggested that “products” might mean (a) specific Prophet products, (b) any Prophet products, (c) business process software designed for the fresh produce market, (d) business process software for businesses or (e) any software. The Court opted for (c) and therefore granted an injunction as follows:
The Defendant is prohibited, until 3 January 2015 and within the United Kingdom only, from being directly involved in the provision of business process computer software designed for the fresh produce industry, save that the prohibition shall not prevent the Defendant from acting as a minority shareholder or debenture holder or in a business which does not compete with the Claimant.

The Court of Appeal disagreed.


obesity may be a disability

Last month I reported the case of Mr Kaltoft, a Danish childminder who was dismissed because he was too big to carry out some of his duties, e.g. tying children’s shoelaces.

We now have the Opinion of the Advocate General of the European Court concerning the issues raised in the case. Although this is not the judgment itself, such opinions are nearly always followed by the Court.

The key conclusion is that obesity is not of itself a disability and therefore protection from discrimination is not available on this basis alone. However, as is so often the case with European decisions and particularly those concerning employment law, that is not the end of the story.

Advocate General Jaaskinen includes in his Opinion a discussion about body mass index (BMI) which opens the door to the possibility that obesity may be treated as a disability and thereby attract protection from discrimination. In essence he suggests that a person with BMI of over 40 is likely to have problems which hinder his or her “full participation in professional life on an equal footing with other employees due to the physical and or psychological limitations that it entails” in which case obesity “can be considered to be a disability”.

Incidentally, having a BMI of over 40 is what is commonly referred to in the United Kingdom as being morbidly obese. There is a handy BMI calculator (based on height and weight) at the BUPA website (free of charge!).

Of course this opens up the question of where to draw the (waist)line! Is someone with a BMI of 39.5 not disabled and someone with 40.5 disabled? I can see room for a great deal of litigation in this regard. Further the Opinion of the Advocate General is precisely that, an opinion, and not a medical one at that. What if a medical expert expresses the view that someone with a BMI of, say, 35 nonetheless suffers from the characteristics identified as establishing disability.


religion and employment

Two cases of note warrant a mention this month. First, a health worker has been found guilty of misconduct following a disciplinary investigation. Victoria Wasteney, a Christian, is a senior occupational therapist working for East London NHS Foundation Trust was found to have bullied a Muslim work colleague.

The allegations made included:

– asking her to pray with her
– giving her a book about a Muslim woman who converted to Christianity, and
– asking her to a sports day at her church

The decision followed a nine months’ suspension. She has received a written warning and has been told that she must not talk about her faith when at work. However, she is appealing the decision with the support of the Christian Legal Centre. The Centre is well known for being involved in a number of the most high profile religious discrimination cases in recent years.

As I reported in early 2011 there is a particular problem with the interaction between work colleagues and those whose religion includes and encouragement or even obligation to evangelise. It is a classic dilemma of competing human rights.

Meanwhile details have emerged of a very unusual case including allegations of sectarianism, not in Northern Ireland but in Scotland Yard. Detective Inspector Paul Armstrong, a Roman Catholic, says that he was routinely subjected to bullying and harassment by his boss, Detective Chief Inspector Mark Roycroft, and Ulster protestant. He maintains that exclusion from meetings, blocking promotion and career progression and numerous untrue statements constituted direct discrimination resulting from sectarian bias. Scotland Yard is yet to decide whether to contest the claim which is due for a hearing in the central London Employment Tribunal in September.


cases proving costly to the public purse

On 22 July news emerged via BBC Newsnight that Haringey Council accounts show that a payment of £679,452 was made to Sharon Shoesmith.
1) Haringey council accounts are out showing £679,452 settlement w Sharon Shoesmith, first revealed in Oct on #newsnight with @jakemorristw

— Allegra Stratton (@BBCAllegra) July 22, 2014

The breakdown reveals salary and related payments amounting to £377,266, £217,266 compensation for loss of office and £84,819 for employer contributions. The Council had already disclosed that it has paid legal costs amounting to £196,000.

Ms Shoesmith has said that she “does not recognise” the figure quoted. The likely reason for this response is that the terms for settlement were set out in a settlement agreement with a confidentiality clause. Haringey has almost certainly breached the clause by disclosing the amounts but they were in a catch 22 because they are at the same time obliged to itemise such expenditure in the accounts. They will probably say that they were legally bound to make the disclosure notwithstanding that the disclosure defeats the purpose of the clause.

In the meantime Caerphilly Council will have paid suspended chief executive Anthony O’Sullivan over £330,000 by the time of his trial for misconduct in public office in January 2015. His suspension commenced in early 2013 when a police investigation was launched. There is a well known problem in progressing disciplinary proceedings while criminal investigations and proceedings are ongoing since employment sanctions cannot be imposed without proper investigations and disciplinary proceedings and it is generally thought inappropriate for criminal and employment proceedings to run in parallel. Of course, to suspend without pay would be likely to indicate a presumption of guilt so the Council really has no option other than to make the payments.

Audit costs add a further £900,000 and £1.5m extra will have been paid to employees as a result of the disputed pay deal.


crackdown on bankers? is it really all it’s cracked up to be?

On 30 July and amid much fanfare the Bank of England’s Prudential Regulation Authority announced what is to be “the strictest industry regulation in the world” with a wide range of civil and criminal sanctions available to be applied against defaulting bank employees.

Headlines included a new criminal charge of “reckless mismanagement” which could lead to imprisonment if banks are not run properly. There is also the prospect of recouping bonus payments for up to seven years in respect of those who are found to have been “guilty of misconduct”.

Recoupments are to apply even if the money has been paid and spent.

Although cautiously welcomed by Anthony Jenkins, chief executive of Barclays, the general industry response has been swift and predictably negative. According to the British Bankers Association the new rules will place the UK banking industry at a competitive disadvantage. They have also trotted out the usual claim that City bankers are paid less than in other major financial centres and there might therefore be a dispersal of talent elsewhere.

Are the new rules really so severe? As far as criminal sanctions are concerned, they will require legislation so will first be subject to parliamentary scrutiny. It is likely to be very difficult to pin the criminal burden of proof – guilt beyond all reasonable doubt – on a specific individual or individuals. However, bankers can already be imprisoned and face unlimited fines for “causing a bank to fail” by taking a “reckless decision”. So is this really the “game changer ” that some have suggested?

As for civil penalties, there are obvious employment aspects. Significantly, although it was considered, the rules will not be applied retrospectively. This is no surprise since, to do so, would have the effect of imposing sanctions for breaches not identified as such at the time.


is obesity a disability?

Under the Equality Act 2010 disability is a physical or mental impairment that has a ‘substantial’ and ‘long-term’ negative effect on one’s ability to carry out normal daily activities. According to government guidance “Substantial” is more than minor or trivial – e.g. it takes much longer than it usually would to complete a daily task like getting dressed, and “long-term” means 12 months or more – e.g. a breathing condition that develops as a result of a lung infection.

What is potentially a landmark case was heard by the European Court on 12 June and the decision when delivered could have ramifications that require significant adjustments to working arrangements. Danish child minder Karsten Kaltoft weighs 25 stone. He was sacked by his local authority because he could not perform his duties. As a result of his size he is unable to tie children’s shoelaces.

Of course, the main dilemma here is whether the condition is regarded as self-inflicted or caused by, say, a genetic predisposition. Medical evidence in this regard is likely to prove to to be very contentious. And what of conditions which might have been caused or contributed to by obesity, e.g. diabetes? In Walker v Sita (2013) the Employment Appeal Tribunal noted that 21.5 stone Mr Walker suffered from 16 medical conditions which were compounded by his obesity. The employment tribunal found that he was not disabled since there was not a physical or organic cause of his conditions other than his obesity. The EAT disagreed and held that he was disabled on the basis that his physical and mental impairments were genuine and their cause was irrelevant. However it was noted that obesity in itself did not render him disabled. If the European Court decision goes in favour of Mr Kaltoft such distinctions will no longer matter.

Changes that may have to be implemented include special seating, access to the workplace and the location of car parking places. Further, employees will not be able to be dismissed merely because they are overweight.

In the UK 64% of adults are classed as overweight or obese, of which 23.1% are obese. The number of obese people has trebled in the last 25 years.


are you ready for this? over a quarter of all employees are planning to make flexible working applications

As I reported last month the right to request flexible working is extended to most employees with effect from 30 June 2014. According to a YouGov survey of over 2000 adults carried out for Croner 26% of UK workers plan to do so. However research by Timewise suggests that as many as two in five employees want to work fewer hours or remotely, in addition to the 25% of employees who already work part time (8.18 million currently work 30 or fewer hours per week). In the longer term 70% of employees say that they want to work flexibly at some point in the future.

There is a significant disparity in the availability of part time work between junior and senior posts. 43% of advertised jobs open to flexible working are junior or entry level whereas only 9% of leadership roles and 14% of directorship roles offer flexibility. One of the problems facing applicants for flexible working is that there is a common perception still held by managers that this demonstrates a lack of ambition or less commitment, particularly in SMEs.

This manifests itself in the concern expressed by applicants for flexible working. The Timewise survey revealed that 42% of people who need flexibility worry about when to ask about it in the recruitment process and 52% feel nervous or very nervous about doing so.

From the employers’ perspective research conducted for Weber Shandwick revealed that 11% think that the changes will have a positive effect, 21% a negative effect and 64% think it will make no difference, while 4% don’t know. However 9 in 10 employers say that they welcome questions about flexible working.

Significantly, 75% of employers say that they have had no training on how to deal with flexible working applications.


the mental processes of decision influencers that can lead to age discrimination

In Reynolds v CLFIS (UK) Limited Mr Justice Singh, sitting in the Employment Appeal Tribunal, considered the motivations of individuals, conscious or subconscious, that can lead to discrimination.

Dr Reynolds OBE was employed by Canada Life from 1968 to 1992 as a doctor and insurance expert and, latterly, as the Company’s chief medical officer. In 1992 she was made redundant but continued working on a consultancy basis. However in 2010 the consultancy agreement was terminated by Canada Life. A Mr McMillan had made a presentation to Mr Ian Gilmour, the Company’s most senior employee in the UK. As a result of the presentation Mr Gilmour decided that Dr Reynolds was not delivering the service required and could not remain in her post as chief medical officer. Following discussions between others including the HR manager it was decided that a clean break was required by dispensing with her services altogether.

Dr Reynolds believed that the decision was prompted by age discrimination. At the date of termination she was 73 years old and had worked for Canada Life for 42 years. At the resulting employment tribunal hearing all attention focused on the mindset of the person who took the decision to dismiss. The claim failed and Dr Reynolds appealed on the basis that analysis of the decision to dismiss should not have been confined only to the person who ostensibly took the decision.

On appeal it was acknowledged that the decision to terminate the contract “had been shaped and informed by the views of other persons, in particular a presentation given to the eventual decision-maker”, Mr Gilmour. Accordingly it was necessary to consider the mental processes in the context of age bias not just of Mr Gilmour but also others in the organisation whose views might have had a significant influence on the decision.


minor and spent offences must no longer appear on CRB checks

R (on the application of T and another) (Respondents) v Secretary of State for the Home Department and another (Appellants) is a decision of the Supreme Court concerning the disclosure of convictions.

Criminal record checks (commonly referred to as CRB checks) have been commonplace in some employment sectors for many years and for obviously good reasons. However, over the last few years their use has become much more widespread. According the latest available figures 2,981,958 checks were carried out in 2011 and it is likely that the number has increased in subsequent years (estimated 4 million in 2013). There has also been a great deal of concern expressed about the number of inaccurate records held – since 2003 over 19,500 challenges have been upheld.

Another area of concern is that historic offences might unfairly prejudice jobseekers and thereby undermine the objective of having spent convictions. For example, The Guardian reported the case of an otherwise exemplary A grade student who was prevented from training as a doctor at Imperial College because of a “spent” conviction. Majid Ahmed had served four months’ community service when a minor following a conviction for burglary.

The Home Secretary and the Justice Secretary took the issue to the Supreme Court when it was held by the Court of Appeal that prospective employers did not need to be notified about spent convictions.

Under the Rehabilitation of Offenders Act 1974 if someone is asked about his or her criminal record there is no obligation to disclose spent convictions. Further, an employer must not make any decision prejudicial to the individual with reference to spent convictions. This also applies to cautions, warnings and reprimands (which are treated as spent as soon as they are given).

However there are exceptions to these general rules, particularly with reference to certain types of employment and professions. In these cases enhanced criminal record certificates can be obtained which include disclosure of every “relevant matter” on the Police National Computer, including spent convictions and cautions. Incidentally, there are similar concerns about the accuracy of data held on the PNC. 3509 people have been found  to have inaccurate records in the four years to 2012, over the same period, 2918 had the record of the wrong person disclosed in response to a CRB enquiry and 3547 people had the wrong information recorded or passed on by the police at a local level.

In this case the Supreme Court considered “T” to whom two police warnings were issued in 2002 concerning the theft of two bicycles. The warnings were disclosed in 2008 when he applied for a part-time job with a football club and, again, in 2010 when he applied for a place on a sports studies course.

“JB” was 41 when she was issued with a caution in 2001 concerning the theft from a shop of a packet of false fingernails. In 2009, having completed a training course for employment in the care sector, the training organisation told her that it was unable to put her forward for employment when the caution came to light.