What’s new in employment law…?
In this article we highlight some recent employment law changes and developments, which are of particular relevance to employers managing negotiations with departing employees and the financial entitlements of such staff.
Taxation of termination payments
Important changes to the way in which termination payments are taxed came into force on 6 April 2018, which are likely to have (unhelpful) implications for employers negotiating exits with employees.
The new taxation rules relate specifically to payments in lieu of notice (PILONs) in respect of employment which ends after 6 April 2018 and where the sums are paid on/after that date. In summary, the new rules mean that all notice pay should be treated as earnings and subject to tax and national insurance contributions, regardless of whether or not there is a PILON in the employment contract. Previously where there was no contractual PILON the payment could be made tax free up to £30,000.
A specific formula is set out in the legislation to calculate what element of a termination payment must be treated as notice pay – referred to as Post Employment Notice Pay or PENP. The PENP is the basic pay an employee would have received if they had worked out their notice (whichever is the longer of the statutory or contractual notice period), from which any PILON already paid would be deducted.
The well-known £30,000 tax exemption provisions for termination payments, set out in the tax legislation, can still be utilised in respect of any additional sums payable to the departing employee where these genuinely represent compensation for loss of employment (e.g. statutory redundancy payments).
It should be noted that injury to feelings payments (where connected to the termination of employment) now fall outside the tax exemption provisions unless the injury amounts to a psychiatric injury or another recognised medical condition.
Whilst these changes to the taxation of termination payments were heralded as simplifying this complex area it is safe to say that the position is far from straight-forward and is also likely to impact detrimentally on employers conducting exit negotiations given that the carrot of a tax-free notice payment is no longer available.
Finally, and for completeness, it should be noted that from April 2019 termination payments above £30,000 will be subject to class 1A (employer’s) NICs.
New Compensation limits
From 6 April 2018 compensation limits and minimum awards payable under employment legislation increased. The key increases to be aware of are: –
- A week’s pay (for the purposes of calculating statutory redundancy payments and the basic award for unfair dismissal, amongst other things) – £508
- Maximum basic award/statutory redundancy pay – £15,240
- Unfair dismissal compensatory award limit – £83,682 (or a year’s salary if lower).
The new rates apply when the appropriate date for the cause of action (i.e. the effective date of termination in an unfair dismissal claim) is on or after 6 April 2018. If the appropriate date falls before 6 April 2018 the old rates will apply.
The level of payment for injury to feeling awards (a sum that can be claimed in an ET claim for discrimination in contravention of the Equality Act 2010) also increased as of 6 April 2018, the new compensation bands are:
- Lower Band £900-£8,600 (for less serious cases)
- Middle Band £8,600-£25,700 (for cases that do not merit an upper band award)
- Upper Band £25,700-£42,900 (for the most serious/severe cases).
The increase in compensation levels, especially following the removal last year of the requirement to pay a fee to lodge a claim in the Employment Tribunal and then a further substantial hearing fee, is likely to mean that ex-employees may feel that they have little to lose and much to gain by raising a claim in respect of the termination of their employment.
Caselaw development
Newcastle upon Tyne Hospitals NHS Foundation Trust v Haywood
The Supreme Court’s judgment in this case confirms that where a contract is silent on when notice is deemed to be given, notice takes effect when it is received by the employee and they have read it, or had a reasonable opportunity to do so.
The claim was brought (initially in the High Court) by Mrs Haywood, a long-serving NHS employee. In April 2011 Mrs Haywood’s post was identified by the Trust as being at risk of redundancy. Both parties knew that if she was made redundant on or after 20 July 2011 (Mrs Haywood’s 50th birthday), she would be entitled to a higher value NHS pension.
Mrs Haywood told the Trust that she would be on holiday 18 April to 3 May 2011 (and in Egypt between 19 and 27 April). On 20 April 2011, the Trust issued written notice (by three different methods, namely: ordinary post; recorded delivery post; and by email to her husband’s email address) of the termination of employment on the grounds of redundancy. The notice stated that Mrs Haywood’s notice period was 12 weeks and that her employment would end on 15 July 2011 (five days before her 50th birthday).
There were no provisions in the employment contract detailing when notice would be deemed to have been received. Mrs Haywood read the letter on her return from her holiday on 27 April and therefore claimed that her 12 weeks’ notice did not begin until she received and read the letter, meaning the notice period expired on 20 July 2011 and she was entitled to the higher NHS pension. The High Court ruled in favour of Mrs Haywood, as did the Court of Appeal and those decisions were up-held by the Supreme Court.
The Supreme Court held there was no reason to depart from caselaw dating back to 1980, which had held repeatedly that written notice does not take effect until the employee has, or has had a reasonable opportunity to, read that notice. Further, the court found it was open to employers to make express reference to when notice is deemed to be received.
This case emphasises the importance and benefit of express contractual provisions, to avoid uncertainty when, in a case such as this, a situation is time critical. It also serves as a useful reminder that employers need to understand the importance of acting in accordance with contract terms (which should be regularly updated) or to seek advice when there is doubt about the position. For example, in this case, the issue for the Trust could perhaps have been addressed by giving Mrs Haywood notice in person before her holiday rather than by post.
Conclusion
Terminating a contract of employment is rarely a straight-forward or risk-free matter for employers (especially smaller employers such as GP practices with limited specialist HR staff). It should therefore always be conducted cautiously after appropriate consideration has been given to the potential employment law issues that could arise in each particular case.
The potential financial and reputational risks for employers should not be over-looked but with some careful planning such issues can be mitigated against/managed. If in doubt, and especially in complex/acrimonious exit situations, it would be prudent to take specialist legal advice.