Compromise Agreements and Redundancy


Compromise agreements may become relevant in a redundancy situation. As the economy worsens, it is advisable for employees to check their contracts of employment for company redundancy procedures. This will allow an employee to be prepared if your company announces redundancies. An employment law solicitor can give you advice on the small print of your employment contract if needed. For the initial advice session, the costs are not likely to be high, and could provide you with piece of mind going forward.

Compromise agreements may be used as a tool to avoid redundancy by your employer. Before we go into the details of compromise agreements, lets first look at redundancy terms. In order to assist you with understanding your employment contract, we go though some of the clauses which may be in your contract of employment -

Redundancy

A redundancy compromise agreement may arise if the redundancy procedure is not carried out properly. There are many myths surrounding redundancy and compromise agreements. We will try to dispel these in this article, and try to understand what redundancy really means. When an employee is no longer needed within a company, this is redundancy. It could be because fewer people are needed to carry out the role, or perhaps a department is being closed down. This may occur when a company ceases trading altogether, closes a particular store or department, is unable to secure new contracts or renew existing ones, or invests in technology that makes certain positions unnecessary.

Generally there are two types of redundancies- voluntary and compulsory. With the former type, this usually happens when cut backs are necessary at an organisation. An employer would issue a request to employees to step forward on their own accord. Unfortunately, with compulsory redundancy the process is often not as nice. A fair procedure is used by employers and employees are selected based on a pre-set criteria. Those falling foul of the selection process will be asked to leave the company, against their wishes.

Lay off


Someone that is employed could be asked to leave work, if there is not enough for him/her to do. This is not a long term solution and should never be used as one.

Short Time Employment

Where an employee has their hours and pay reduced below half a week of the norm. Another alternative to full redundancy.

Collective Redundancy Consultation


If a company wishes to make more than twenty members of staff redundant,a specific procedure needs to be followed called a CRC (collective redundancy consultation), this will require the company to inform employees of its intentions by informing the BERR. In addition to this, the company has a obligation to inform those who represent the employees within a set time frame, usually 30 days before the initial redundancy. Please note that should over 100 employees be at risk, this time period is extended to 100 days.Employment law advice should be taken because there will be employment claims made against the employer for unfair dismissal.

Statutory Redundancy Pay


The sum that an employee is due to receive as part of their redundancy. Full time employees that have been with an organisation for two or more years will be entitled to statutory pay. This is set in stone by law and is the minimum you should receive.The actual amount received by an employee is dependant on the number of years worked at the company, limited to 20 years. These calculations are beyond the scope of this articles. An employment law solicitor will be able to advise you further. More details can be found in your contract of employment or staff handbook. If you are unable to find this information you should ask your HR department as soon as possible. Please note that if the settlement amount is less than £30,000, there will be no tax.

Unfair Dismissal

An employee has a right to not be unfairly dismissed. A company needs to carefully select candidates for redundancy whilst following a fair procedure.In instances where an unfair procedure has been implemented, an employee may raise this point with an employment law solicitor. This could result in a large pay out if you can prove your case. A company will try to avoid going to court over this and may offer you a compromise agreement. An example of obvious unfair dismissal is when discrimination can be proved against the employer. The penalties are severe.

Guarantee Payments


It does not matter if there is no work at a company, provided there is a guarantee of payment in place. This protects the employee as it means that an employer can not simply cut an employee's income at will.

Protective Award

If a proper redundancy consultation procedure is not followed (i.e. if employees are made redundant without their representatives or themselves being given sufficient notice) the employee has the right to claim a protective award, which typically takes the form of ninety days payment.


If an employer fails to follow the correct procedure, an employment may be avoided through the use of a compromise agreement. For many, using a compromise agreement is good, as it saves time and unwanted additional costs.This will of course result in higher payouts to employees. In order to make the most of the situation, employees and employers should seek legal advice from an employment law solicitor.

More information here:

compromise agreement employment law advice

In many instances a compromise agreement may contain provisions wherean employee may reap payment for redundancy which is more than the minimum amount as stipulated by the government that a holder of office is to by the state.

To determine whether tax is due on monies acquired as compensation for redundancy, very much depends on whether the numerous parts, that make up that termination payment is a payment by the employer in return for work performed under your under contract of employment. If the payment or part of that compensation is for the service of employment, then this element of the compensation will be taxable under the Income Tax (Earnings & Pensions) Act 2003.

PILON is a contractual right to pay an employee a lump sum rather than require them to work out their statutory or contractual notice period. If there is no PILON clause in a contract of employment then an employer who pays an employee a lump sum salary payment instead of requiring them to work their period of notice will technically be in breach of contract but the employee will usually have suffered no loss. It should be noted that PILON may be taxable. The reasoning is that an employee has a contractural right to continue receiving payment for services.

Lets consider another scenario, say an employer decides to compensate an employee for loss of office, with for example a sum of money that an employee is not entitled to under his or her contract of employment, then this will attract tax by HM Customs & Revenue.

So, to understand whether tax is due on an employee's termination payment, the starting point is to ask whether the termination payment is contractual i.e is the employee entitled to the payment under contract. HMRC will consider the payment as taxable if the contract or practice of the employer provides the employee a legal right to obtain a sum of money when employment is terminated.

If there is any doubt whether tax is payable on all or part of a payment within a redundancy compromise agreement, Revenue and Customs may ask to see the employee's contract of employment and any other documentation for it to decide whether there was a contractual entitlement or a practice by the employer to give certain payments on termination of employment. In other words, if there is no reference to a contractual entitlement the Revenue can still claim that tax is due if it can prove that there was a "reasonable expectation" on the part of the employee to the termination payment by looking at past practice and policy of the employer to see if other employees received such payments in the past.

Up to £30,000 of a legitimate settlement sum is tax free. This is provided for in current government legislation. In order to receive the full tax allowance on £30,000, none of the the termination payment must be part of a contractual entitlement.

Click here for more details on compromise agreements:
Compromise agreements

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