A Personal Perspective on Employment Law

A Blog to be enjoyed by Human Resources Professionals, Employment Solicitors and Barristers and anyone else
who is interested in the world of employment law.









Monday 4 July 2011

My first article!


 Hi

Please find below an article I wrote for my firm about ex-gratia payments and payments in lieu of notice. As you can see what appeared to be a straightforward termination letter cost an Employer over £20k (ouch!!):-

Termination Letter costs Employer £20,000

A Company has found itself in hot water when it tried to make a payment in lieu of notice tax-free. The Company described the payment in a termination letter as an “ex- gratia payment”. This description proved costly as the Employment Appeal Tribunal decided that the wording of the letter meant that the employee was entitled to a further £20,000 in notice pay on top of the £20,000 she had already received.

The case of Publicis Consultants v O’Farrell related to an employee, Ms O’Farrell, who had been made redundant. Ms O’Farrell was entitled to three months’ notice but was actually only given one days notice that she was being made redundant. Her employers decided to pay her in lieu of notice. In an effort to avoid the payment being liable for tax they described Ms O’Farrell’s notice pay in her dismissal letter as an “ex-gratia payment equivalent to three months’ salary”.

Ms O’Farrell made a tribunal claim stating that her contract of employment had been breached because her employers had not paid her any notice pay. Her employers argued that her contract had not been breached as it was clear that the ex-gratia payment was intended to be the notice payment.

Unfortunately, as the payment was described as ex-gratia payment rather than as a payment in lieu of notice, the Employment Appeal Tribunal found in favour of Ms O’Farrell stating that the payment was a separate ex-gratia payment and she was still entitled to her notice pay. The Tribunal ruled that she was entitled to three months pay totalling £20,625 (less tax and NIC). From the Company’s point of view this judgment further rubbed salt into the wounds as Ms O’Farrell had already successfully claimed that she had been unfairly dismissed.

The strict interpretation by the Tribunal shows that notice payments cannot also be ex-gratia payments (and vice versa) and this case clearly illustrates the risks when employers try to avoid tax on notice payments in this manner.

These risks do not just apply to redundancy situations but also when an employee’s employment is being terminated for any other reasons. Employers should consider protecting themselves from such claims by entering into a Compromise Agreement with the outgoing employee or at the very least they should ensure that they receive advice from an employment solicitor before terminating their employment.

For further employment advice, please contact any member of the employment team at Thomas Eggar. We can draft compromise agreements for a fixed fee and can assure our clients that no letter written by us will cost £20,000!

Andrew Browning
Employment Solicitor


 

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