Termination payments and benefits: example: compromise agreements
Sections 62 and 401ITEPA 2003
A compromise agreement (see EIM12855) states that it settles all claims in respect of the employment or its termination for £35,000. No contractual claims are specified in the agreement.
The contract of employment provides for a terminal bonus of £5,000 to be paid. This bonus has not been dealt with elsewhere.
By its wording, the agreement satisfies that entitlement. £5,000 of the £35,000 is earnings from the employment within section 62 ITEPA 2003 (see EIM00515).
An employment contract says that the employer is to give either 6 months’ notice or a payment in lieu of notice. The employee is dismissed without notice on 13 July 2016 and negotiations commence. These result in a compromise agreement (see EIM12855) which states that it settles all claims in respect of the employment or its termination for £35,000. No contractual claims are specified in the agreement itself.
The circumstances show that the employer is dismissing the employee and the compromise agreement represents a negotiation of the terms of that dismissal.
If the employee had been dismissed without the agreement, there would have been a contractual entitlement to a payment in lieu of notice, if notice was not given. The employer does not have any discretion about paying the PILON under these contractual terms. Those terms require that if notice is not given then the employer has to make a PILON instead.
So part of the £35,000 satisfies that contractual entitlement and is earnings from the employment as described in EIM12976.
An employment contract says that the employer can terminate by giving 6 months’ notice or, at its discretion, by making a payment in lieu of notice. The employee is dismissed without notice and the employer immediately makes it clear that its discretion to make a payment under the contract is not being exercised. Negotiations take place because the employer (a) prefers to settle the matter by making a payment of damages for breach of contract rather than face the expense and uncertainty of legal proceedings by the employee and (b) believes that the employee has found another job and so the payment can be less than would be due under the contract (see EIM13070). The negotiations result in an agreement for a payment equal to the gross salary and benefits that would have been paid in the notice period, less a deduction to reflect the fact that the employee had found an equivalent job starting in 2 months. The character of the payment is damages for breach of contract and so falls within section 401 ITEPA 2003 (see EIM12978, EIM13070, EIM13874 and EIM13922).