Termination payments and benefits: example: damages for breach of contract
An employee earning £25,000 per annum is dismissed on 25 July 2000 and does not receive the 6 months’ notice to which the employment contract gives entitlement. There is no automatic payment made by the employer (see EIM12977). The employer’s failure to meet the contractual requirements represents a breach of contract. The failure cannot be put right (since notice of termination cannot be given retrospectively), so the only remedy is to compensate for the loss by paying damages.
The loss is calculated at £12,000. See EIM13070 for an explanation of the usual method of calculating such payments.
The £12,000 payment is not earnings from the employment (see EIM00515). It does not stem from the terms of the employment but instead represents compensation to the employee for the loss resulting from the employer’s breach of the agreed terms. The payment is correctly described as compensation for loss of office and so section 401 ITEPA 2003 applies.
Note: a breach of contract does not necessarily have this result. Failure to pay wages due is also a breach of contract, but the remedy may be to enforce the contractual terms (rather than seek damages for a breach that cannot be put right). The result is that when the wages are eventually paid, they are still paid under the contractual terms and so remain earnings from the employment within section 62 ITEPA 2003.