HR Focus August Welcome to this month s edition of HR Focus. Payments in lieu of notice the tax position

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1 HR Focus August 2009 Welcome to this month s edition of HR Focus Reports this month have indicated that the number of people out of work in the UK has risen to its highest level since 1995, taking the jobless rate to 7.8%. It is predicted that unemployment will still continue to rise even if the economy does begin to grow again this year. This increased level in unemployment is likely to lead to further increases in Employment Tribunal claims and increased levels of compensation sought by employees. On this basis employers need to take even more care as to how they deal with job applicants and employees particularly when it comes to dismissal. Please your suggestions and your questions for our question and answer feature to askemployment@weightmans.com. Alternatively, you can call Laura Kearsley, Editor on We look forward to hearing from you. In this month s edition: Payments in lieu of notice the tax position Whether or not a payment in lieu of notice should be subject to deductions for tax and national insurance can be a difficult question when preparing compromise agreements. Stuart Jones, Partner in the Liverpool team discusses the issues in light of the recent decision in Cornell v Revenue & Customs. Leeds City Council v Woodhouse - customer liable for discrimination against service provider s employee Case Review: Leeds City Council v Woodhouse. Jessica Baden-Daintree, Associate in the London team considers the impact of this case where the Employment Appeal Tribunal held that a customer could potentially be liable for discrimination against the employee of a third party service provider. The importance of face to face meetings for dismissals The recent Court of Appeal decision in Gisda Cyf v Lauren Barrett has highlighted the fact that employers may face legal action if they only notify the employee of their dismissal in writing. Stuart Jones, Partner in the Liverpool team examines these issues relating to dismissals for Human Resources magazine.

2 Islam Channel Ltd v Ridley assessment of compensation Case Review: Islam Channel Ltd v Ridley. Paul McFarlane, Associate in the London team considers this case on compensation to be awarded in unfair dismissal claims where the claimant gets a new job which pays more but is less secure than the job they were dismissed from. ACAS code of practice notifying employees of disciplinary meetings And in our regular Question and Answer section, Gemma Raisbeck from the Coventry Building Society HR Team asks Jane Hobson, Partner in the Midlands team: under the new ACAS Code of practice, are employers always required to give employees prior notice of meetings that take place with them as part of the disciplinary process?. This update does not attempt to provide a full analysis of those matters with which it deals and is provided for general information purposes only and is not intended to constitute legal advice and should not be treated as a substitute for legal advice. Weightmans LLP accepts no responsibility for any loss that may arise from reliance on the information in this update. The copyright in this update is owned by Weightmans. Payments in lieu of notice the tax position The recent case of Cornell v Revenue & Customs [2009] serves as a useful reminder of the confusion that sometimes surrounds the appropriate tax treatment of payments in lieu of notice (PILON). Character of the payment Establishing the correct tax treatment of a PILON involves analysing the specific characteristics of that PILON, and subsequently applying the appropriate tax principles in the circumstances. While a PILON is often paid alongside other sums of money on termination, it is important to note that the tax treatment of the PILON payment will be determined by the particular character of that payment, not the context in which it is paid. The terms of the employment contract will usually determine this. If there is an express, or implied PILON clause in the contract, a PILON will be deemed to arise from employment; paid as a reward for the employee s services. The basic tax principle is that if a PILON is determined to arise from employment, it will be taxable. Therefore, such a payment should be processed through payroll as normal salary would be. The advantage of incorporating a PILON clause into a contract is that this enables an employer to retain the effect of restrictive covenants, without giving due notice. If there is no express or implied PILON clause and the employer makes a PILON payment as they do not want the employee to work out their notice, then the employer will be acting in breach of contract. Any PILON will be deemed to be a payment made in compensation for this breach, not as an emolument for services, and the payment will be tax free up to 30,000 under section 401 of the Income Tax (Earnings and Pension) Act Also, any restrictive covenants will be void as the employer will have acted in breach of the contract, by not giving due notice.

3 Implied PILON clauses Employers should be aware that where there is no written or express PILON clause, a contractual clause may still be implied. For example, oral agreements, a staff handbook or wage agreement may be deemed to make up part of the contractual arrangements. An implied contractual right to a PILON may also arise if an employer regularly makes non contractual PILON payments. All the circumstances of an individual case, therefore, need to be carefully considered before a decision is made regarding the taxability of a PILON. If there is any doubt about the appropriate way to treat a payment for tax purposes, the safest option for the employer may be to payroll the payments, and leave the employee to argue the nature and appropriate tax treatment of the payment by way of their self assessment form. An indemnity clause should also be included if a compromise agreement is being entered into, allowing the employer to seek recompense from the employee should any tax or NICs be deemed due at a future date. Stuart Jones, Partner, stuart.jones@weightmans.com Leeds City Council v Woodhouse - customer liable for discrimination against service provider s employee In Leeds City Council v Woodhouse and ors UKEAT 0521/08 the EAT considered the circumstances in which an individual providing work for a third party who is not their employer is protected from race discrimination by the third party or its employees. In this case, the Council was found potentially liable for the act of one of its employees who discriminated against an employee of one of its service providers. The decision is relevant for employers who outsource services or use agency workers. Such employers can be liable for discrimination claims, not only from their own employees but also from the employees of an external company where work is outsourced. Facts Mr Woodhouse, who is of African Caribbean origin, is employed by West North West Homes Leeds Ltd ( WN ), an ALMO (Arms Length Management Organisation) providing outsourced housing management services to Leeds City Council. One of Mr Woodhouse s duties was to check that the work of an employee of the Council's property services division, Mr Chapman, complied with the terms of the appropriate service level agreement. Procedural background Mr Woodhouse issued race discrimination proceedings against Mr Chapman, WN and the Council, alleging that, in the course of his work, Mr Chapman had made racially derogatory comments about him. Mr Chapman and the Council applied to be struck out as respondents. The employment tribunal dismissed the strike out application. EAT decision The correct test is whether the work being done by the individual is for the benefit of the third party (with the third party having some control over the individual s working conditions) and the discrimination is in relation to that work. The tribunal should analyse "who was doing what and for whose benefit". In this

4 case it was clear from their analysis that the Council was the beneficiary of the quality control work being done by Mr Woodhouse. The Council has applied for leave to appeal the EAT's decision. Note on Employer Liability Mr Woodhouse s rights against his employer are likely to be limited because an employer is not liable for the acts of a third party such as a customer, supplier or visitor to its premises who harasses or discriminates against one of its employees, unless the third party can be said to be the authorised agent of the employer. Due to an Equal Opportunities challenge based on the Equal Treatment Directive, there is an exception for sexual harassment, whereby an employer will be liable if it fails to take reasonable steps to prevent a third party from harassing an employee in the course of her employment, but only where the employer knows the employee has been harassed in the course of her employment on at least two previous occasions by a third party. The Equality Bill extends third party harassment for all strands of discrimination (e.g. race, religion etc.). Jessica Baden-Daintree, Associate, jessica.baden-daintree@weightmans.com daintree@weightmans.com The importance of face to face meetings for dismissals What are the dangers of dismissing an employee by letter? Stuart Jones, Partner in the Liverpool team examines the issues for Human Resources magazine: Stuart Jones,, Partner, P stuart.jones@weightmans.com Islam Channel Ltd v Ridley The recent EAT decision in Islam Channel Ltd v Ridley assesses the compensatory element of an award for unfair dismissal, when the ex-employee gains potentially better paid but more precarious employment. Background The Claimant, Ms Ridley, is a television journalist. She was found to have been unfairly dismissed by her employer, Islam Channel Ltd. She subsequently obtained work with a new company, on a freelance basis. For the first 30 weeks of that work she was making more money than she had while with the Respondent, as she was producing two shows a week. After that period, she produced one show a week for a period of 19 weeks. At the time of the tribunal assessment (in July 2008), her earnings were 512 a month less than her previous earnings. However, overall she was approximately 5,000 better off than had she worked for the Respondent during that time. Ms Ridley sought one year s future loss, running from the date of the hearing.

5 Employment Tribunal decision The Tribunal awarded Ms Ridley future losses of 6,149, consisting of 12 months losses at just over 512 per month. It was accepted that her new position was inherently insecure and that the industry she worked in was uncertain with high unemployment rates. Her claim for one year s future loss was regarded as modest. The Tribunal considered that she should not have to give credit for the additional 5,000 she had earned up to the date of the Tribunal hearing. The Respondent appealed this decision. Employment Appeal Tribunal (EAT) Decision The EAT considered whether it is incumbent upon Tribunals, when assessing future loss of earnings, to set off the excess past earnings against the future loss claimed. The relevant law is set out in Section 123(1) of the Employment Rights Act 1995 which provides that the amount of the compensatory award shall be such amount as the Tribunal considers just and equitable in all the circumstances. The EAT considered whether the successful mitigation by the Claimant broke the chain of causation. The relevant leading cases are Whelan and Anor v Richardson [1998] ICR 318 and Dench v Flynn and Partners [1998] IRLR 653. In Whelan the EAT held that loss flowing from a dismissal ends when the employee obtains permanent employment paying the same as or more than would have been earned with the Respondent. The chain of causation is therefore broken, and cannot be revived if the employee loses a new job through either his or her own action or that of the new employer. Equally, the employer cannot rely on the employee s increased earnings to reduce the loss sustained prior to taking new employment. The Court of Appeal qualified the Whelan principle in Dench, holding that the decision was still subject to what was just and equitable in each case. The EAT considered that a tribunal may, if it is just and equitable, take an overall approach when assessing an award. This would mean adding together all of the actual (past) losses and probable (future) losses and deducting all of the mitigation. Alternatively, a line may be drawn between past and future losses and different tests applied to them. A tribunal is required to speculate as to future losses whereas past losses can be decided as a matter of fact. In this case the EAT adopted a cautious approach and held that the Tribunal would not be committing an error of law if it adopted the latter approach. It therefore declined to intervene in the Tribunal s decision. Comment This case highlights the fact that there is no automatic guillotine that precludes employees who attain an equal or higher income from recovering future losses as a result of losing some or all of that income. Perhaps one factor that swayed the EAT towards this finding was the inherently precarious nature of the Claimant s new work. Paul McFarlane, Associate, paul.mcfarlane@weightmans.com

6 ACAS code of practice notifying employees of disciplinary meetings Gemma Raisbeck from the Coventry Building Society HR Team asks Jane Hobson, Partner in the Midlands team: under the new ACAS Code of practice, are employers always required to give employees prior notice of meetings that take place with them as part of the disciplinary process?. The ACAS Code of Practice was introduced in April this year. It provides practical guidance for employers, employees and their representatives setting out the way in which disciplinary and grievance matters should be handled in the work place. Whilst the Code is not legally enforceable, in cases where it has not been followed an Employment Tribunal can increase an award of compensation by up to 25%. As regards handling disciplinary issues, a key aspect of the Code provides that prior to any disciplinary hearing taking place with an employee, they must be provided with prior notification in writing of their alleged misconduct or poor performance. The reason for this is obviously to give them an opportunity to prepare for the disciplinary hearing including considering the evidence against them so that they are well placed to give their version of events and respond to the allegations. However, this prior notification relates only to disciplinary hearings. At the outset of cases and whilst they are only in the investigatory stages the employer does not need to give the employer prior notification of their concerns or a planned meeting. In fact in certain cases it might well be important for the employee not to be given prior notice and have no opportunity to destroy documentation, cover their tracks or prepare their story. The nature of the employer s business may well also be of relevance in such cases. However, once the investigation has been concluded and the employer has decided to proceed with potential disciplinary action then the employee must be given prior notification of any planned disciplinary hearing. Please askemployment@weightmans.com with your burning questions! Jane Hobson, on, Partner, jane.hobson@weightmans.com