Redundancy - Damages (Breach of Contract)

[JZV74]

Hi,

Have recently been made redundant (mid Jan).

Contract did not permit a PILON so payment of damages was agreed to be made by employer for the breach and the payment to be made was specified in settlement agreement.

Payments to be made comprised below elements,

* Salary, Car Allowance for period worked in Jan

* Holiday Pay Due (remaining days up to termination date plus accrued holiday to what would have been normal notice period end (mid Mar) )

* Redundancy Statutory

* Ex Gratia payment

*** Note: Redundancy and Ex Gratia combined exceeded 30k

* Damages


Employment terminated week 2 and payments all processed via payroll on 31st Jan with payslip provided.

Question 1) How should these payments have been categorised/split out in payslip?

Question 2) What position should have applied in regards Tax/NIC and Pension Contributions related to the damages element?

The way they processed/recorded and confirmed TAX/NIC applied was as below.

Salary (Jan salary and car allowance PLUS portion of damages) - TAX AND NIC AND PENSION CONTRIBUTIONS APPLIED
Holiday Pay - TAX AND NIC
Redundancy - TAX AND NIC FREE
Ex Gratia (Balance of 30K less Redundancy amount) - TAX AND NIC FREE
Ex Gratia (Excess amount over 30 K) - TAX ONLY (NIC Free)
PILON (Small portion of Damages Payment - TAX AND NIC

The remaining portion the Damages payment was included in Salary bucket.

As can be seen and assumed based on my enquiry it's the Damages payment here that seems to be incorrect in the manner they have treated it.

Any advice as what position should have been on this will be very much appreciated.

Thanks
J

[bd6759]

1. The payments should be categorised in accordance with the agreement.

2. It seems that the employer agreed to pay you in lieu of notice and you are calling that damages. Since the employer will also be liable to NIC on those payments he is not likely to categorise them incorrectly. It would suit the employer if it were all exempt.

[JZV74]

1. The payments should be categorised in accordance with the agreement.

2. It seems that the employer agreed to pay you in lieu of notice and you are calling that damages. Since the employer will also be liable to NIC on those payments he is not likely to categorise them incorrectly. It would suit the employer if it were all exempt.

My settlement agreement specifically references that the contract of employment did not permit the company to make a PILON.

Because the contract was breached as result of not being permitted to work the contractual notice period, a damages payment was agreed to be paid. This damages payment and conditions as to why it is being paid is clearly set out in the settlement agreement, so not I that's calling the payment agreed to be made 'damages'.

I think you are right in that because they have acted from a payroll perspective as if the scenario was one of PILON, they have actually increased their exposure on employer NIC liabilities.

On the basis this is clearly a scenario of damages being paid and not a PILON, the core question remains - how should this damages payment be treated from a payroll and Tax/NIC perspective?

I've read info on HMRC website that suggests as damages in this scenario falls into a 401 rather than 62 scenario (apologies that might not have correct designation for two scenarios) so damages has to be treated differently.

Any further advice on this would be very much appreciated.

Thanks
J

[section 44]

the contract of employment did not permit the company to make a PILON.

Are you satisfied that this is correct?

Clearly an employees contract of employment might comprise more than merely a document that is called his employment contract. For example, there might be an employee handbook/general HR policies and of course custom and practice (which isn't documented), that would all need to be taken into account.

[JZV74]

the contract of employment did not permit the company to make a PILON.

Are you satisfied that this is correct?

Clearly an employees contract of employment might comprise more than merely a document that is called his employment contract. For example, there might be an employee handbook/general HR policies and of course custom and practice (which isn't documented), that would all need to be taken into account.

To the best of my knowledge and understanding - yes.

For additional info within the settlement agreement as executed it states (in line with verbal discussion/agreement) within a specific clause that,

'' The Employees contract of employment does not permit the company to make a payment in lieu of notice and the company has not served the required contractual notice on the employee. The company will make a payment to the employee as 'damages' for a breach of contract, following the date of termination. The payment to be made to the employee will be £x.''

I've had confirmed by the company that they have processed the damages amount with both Tax and NIC deductions. Based on what I understand this is incorrect but seek to have the opinion of an expert confirm further.

Again based purely on information garnered from and reviewed on the HMRC website, a payment of damages in such a case should I understand equate, in terms of the net amount that would be received by the employee, to that of the loss suffered as a result of not being permitted to work the contractual notice period.

Is that a correct understanding?

thanks
J

[bd6759]

I agree that if it is "damages" it will not be covered by s62. The payment will be caught by s401. This is really a matter between yourself and your ex-employer because they have not paid you what you are entitled to get under the terms of the agreement, which is another breach of contract!

[JZV74]

I agree that if it is "damages" it will not be covered by s62. The payment will be caught by s401. This is really a matter between yourself and your ex-employer because they have not paid you what you are entitled to get under the terms of the agreement, which is another breach of contract!

So on basis that it is indeed truly a damages payment and falls under s401 am I correct in that it shouldn't then be classified as earnings/salary?

If it was stated in the settlement agreement that 'the payment to be made for damages will be £15,000' how should that payment be processed from a payroll perspective?

Processed as a separate line item to that of salary I would assume - is that correct?

Would the £15k amount be grossed up as required to ensure that the net payment received is £15,000?

If things have been done incorrectly with respect to payroll processing and the tax and NIC that was deducted how do such errors get resolved?

Can the employer resolve or does it become a matter to take up directly with HMRC?

Thanks
J