Matrix Employment Seminar, 27 February 2013

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1 Matrix Employment Seminar, 27 February 2013 Ill-health and damages guidance on causation and calculation Laura McNair-Wilson General Principles Discrimination claims 1. Employees enjoy statutory protection against injury or loss caused by unlawful acts of discrimination under the s.124 Equality Act 2010 ( EA ) which provides: (1) This section applies if an employment tribunal finds that there has been a contravention of a provision referred to in section 120(1). (2) The tribunal may- (a) make a declaration as to the rights of the complainant and the respondent in relation to the matters to which the proceedings relate; (b) order the respondent to pay appropriate compensation to the complainant; (c) make an appropriate recommendation.. (6) The amount of compensation which should be awarded under subsection (2)(b) corresponds to the amount which could be awarded by a county court under or the sheriff under section The amount of any compensation is not to be assessed on the basis of what the tribunal considers to be just and equitable unlike the calculation of a compensatory award in unfair dismissals under ERA 1996, s.123(1). The general principle is that so far as is possible claimants should be placed in the same position that they would have been but for the unlawful act (Ministry of Defence v Cannock [1994] IRLR 509, Ministry of Defence v Wheeler [1998] IRLR 23, CA). 3. In Sheriff v Klyne Tugs (Lowestoft) Ltd. [1999] IRLR 481 the Court of Appeal confirmed that the Employment Tribunal has jurisdiction to award damages for personal injury arising out of acts of discrimination. Stuart-Smith LJ said: In my judgment both the Employment Tribunal under s.56 (Race Relations Act 1976) and the County Court under s.57 (Race Relations Act 1976) have jurisdiction to award damages for the tort of racial discrimination including damages for personal injury caused by the tort. The question which may be a difficult one, is one of 1

2 causation. It follows that care needs to be taken in any complaint to an Employment Tribunal under this head where the claim includes, or might include, injury to health as well as injury to feelings. A complainant and his advisers may well wish in those circumstances to obtain a medical report. 4. A notable feature of personal injury awards in discrimination claims is that the rules on remoteness of damage in negligence claims do not apply. The damage arising out of an unlawful act of discrimination does not need to have been reasonably foreseeable. It is sufficient for the complainant to show that the damages were caused by the unlawful act of discrimination (Essa v Laing Ltd. [2004] ICR 746). 5. In Essa, Pill LJ likened direct discrimination to the torts of assault and battery falling within the category of intentional torts in which remedies are assessed by reference to causation rather than ordinary negligence where the tort may be committed accidentally and are therefore judged on the reasonable foreseeability of the extent of consequent damage. He said [at para. 37] A consideration of, for example, whether there is a duty situation and whether the conduct was reasonable, appropriate in negligence, does not present circumstances and the test by way of direct result appears to me to meet the statutory intention. I see no need to superimpose the requirements or prerequisite of reasonable foreseeability upon the statutory tort in order to achieve the balance of interests which the law of tort requires. It is sufficient if the damage flows directly and naturally from the wrong. While there is force in the submission that, to prevent multiplicity of claims and frivolous claims, a control mechanism beyond that of causation is needed, reliance upon the good sense of the employment tribunals in finding the facts and reaching conclusions upon them is a sufficient control mechanism, in my view. Indirect discrimination 6. In Essa the Court of Appeal took some care to confine its judgment to the particular facts of the case where psychological injury resulted from direct and intentional racial abuse. Pill LJ caveated his conclusions by saying It is possible that where discrimination takes other forms different considerations will apply. The caveat is at least partially reflected in the special rules which govern awards of compensation where the harm arises from acts of unintentional indirect discrimination. EA 2010, s.124(4) provides that where indirect discrimination is identified but the tribunal is satisfied this was unintentional then pursuant to s.124(5) it must not make an order for 2

3 compensation unless has first considered whether to act under s.124(2)(a) make a declaration or (c) make an appropriate recommendation. Whistle-blowing and other detriments 7. Employees enjoy equivalent protection under s Employment Rights Act 1996 ( ERA ) if they have suffered injury as a consequence of unlawful detriment for whistleblowing or for any one of the protected reasons given at ss.43a-47f ERA (such as trade union activity or flexible working). Under s.49 ERA, the claimant may be entitled to an award of compensation that the tribunal consider just and equitable having regard to the infringement of the right in question and the amount of any loss attributable to the act, or failure to act, that gives rise to the compensation. Compensation for detriment claims can also include an award for injury to feelings and/or psychiatric injury: see Virgo Fidelis Senior School v Boyle [2004] IRLR 268 where the EAT held that subjecting a whistleblower to detriment is a form of discrimination. Non-Pecuniary Loss Injury to feelings 8. Compensation in respect of an unlawful act may include compensation for injury to feelings whether or not it includes compensation under any other head of loss (Equality Act 2010, s.119(4)). The purpose of the award as is well known - is to compensate the complainant for the anger, upset and humiliation caused by the unlawful act of discrimination. 9. The Court of Appeal in Vento v. Chief Constable of West Yorkshire Policy (No. 2) [2003] ICR 318, CA, identified three broad bands for assessing injury to feelings awards (enhanced by 20% to reflect inflation in Da Bell v National Society for the Prevention of Cruelty to Children [2010] IRLR 19): (a) Up to 6000 in less serious cases where the unlawful act is an isolated or one-off incident (N.B. awards of less than 750 are unlikely to be made). 3

4 (b) 6,000-18,000 in serious cases which do not merit an award in the highest band. (N.B. In Voith Turbo Ltd v. Stowe [2005] IRLR 228, EAT, HHJ McMullen QC observed that dismissal on racial grounds falls within this band on the basis that it is a very serious incident.) (c) 18,000-30,000 in the most serious cases for example where there has been a lengthy campaign of discriminatory harassment. Awards of more than 25,000 should only be made in the most exceptional cases. 10. In HM Prison Service v Salmon [2001] IRLR 425 the EAT suggested that lower end awards cover comparatively minor instances of upset or distress, typically caused by one-off acts of discrimination. At the upper end the victim is likely to be suffering from serious and prolonged feelings of humiliation, low self-esteem and depression. 11. The exercise of quantifying hurt feelings is inevitably artificial. It was suggested by the Court of Appeal in Vento (No 2) consideration should also be given to the Judicial Studies Board s Guidelines for the Assessment of General Damages in Personal Injury Cases (8 th ed., 2006). Employment practitioners should stay alive to the following principles: a) Such awards are compensatory not punitive; b) Awards should bear some broad general similarity to the range of awards available in personal injury claims and should be bought up to date to reflect inflation. c) Where there is more than one unlawful act of discrimination, a global approach to assessing injury to feelings is preferable to making separate awards for each act (ICTS(UK) Ltd. v Tchoula [2000] ICR 1191). Physical and Psychiatric Injury 12. General damages for pain and suffering and loss of amenities are usually assessed in accordance with the Judicial Studies Board Guidelines for the Assessment of General Damages in Personal Injury Cases (11 th ed. 2009). 4

5 13. The quantum of awards for psychiatric and psychological are determined in accordance with a variety of factors which include (see JSB Guidelines 11 th ed., Chapter 4): (i) The injured person s ability to cope with life and work; (ii) The effect on the injured person s relationship with family, friends and those with whom he or she comes into contact; (iii) The extent to which treatment would be successful; (iv) Future vulnerability; (v) Prognosis; (vi) Whether medical help has been sought; and (vii) Whether the injury results from sexual and/or physical abuse and/or breach of trust; and, if so, the nature of the relationship between victim and abuser, the nature of the abuse, its duration and the symptoms caused by it. 14. The four categories of award are as follows: (a) Severe ( 39,150-82,750) - where the claimant has marked problems with respect to factors (i)-(iv) and the prognosis is very poor; (b) Moderately severe ( 13,650-39,150) where there are significant problems associated with factors (i)-(iv) but the prognosis is much more optimistic. JSB Guidelines expressly state that cases of work-related stress resulting in a permanent or long-standing disability preventing a return to comparable employment are likely to fall within the middle of this category. (c) Moderate ( 4,200-13,650) where the problems associated with factors (i)-(iv) have markedly improved by trial and the prognosis is good; and (d) Less severe ( 1,100-4,200) where the level of the award is determined by the length of the period of disability and the extent to which daily activities and sleep were affected. 15. Where part of the psychiatric condition involves post-traumatic stress disorder ( PTSD ) any award will tend towards the upper brackets described above, which already reflect an element of compensation for PTSD. Separate guidelines address cases where PTSD is the sole psychiatric condition. These also involve four brackets 5

6 of severity which are assessed by reference to the criteria in the 4 th edition of Diagnostic and Statistical Manual of Mental Disorders (DSM-IV-TR). The symptoms concern basic functions (including breathing and bladder control) and the manner in which persistent re-experience of the relevant event manifests itself. Double-recovery 16. Whilst in principle awards for injury to feelings and damages for psychiatric injury are distinct heads of loss, in practice the two types of injury are not always easily separable, giving rise to a risk of double recovery (HM Prison Service v Salmon [2001] IRLR 425). 17. In many discrimination cases, the psychiatric injury is an extension of injury to feelings (for example where a claimant is harassed at work and suffers anxiety and depression which is resolved with a course of counselling). In such cases Employment Tribunals will generally seek to assess the totality of the harm that has been caused and award a global figure to reflect this. However, this is not a cast iron rule and depending on the circumstances a tribunal may award damages separately. 18. In the high-profile case of Michalek v Mid Yorkshire Hospitals NHS Trust [2011] the Employment Tribunal found that the injury to feelings experienced and psychiatric illness were distinct and should be viewed entirely separately. Even though the claimant s psychiatric condition had been caused by the Respondents acts of discrimination it was an illness that persists and endures such that.. the effects are now likely to a significant degree to have effected a permanent change to her personality. Loss of Congenial Employment 19. Compensation for the hurt caused by the loss of a chosen career that gave job satisfaction should properly be absorbed into an award for injury to feelings. 6

7 The impact of the Jackson report 20. It is important to note that the figures given above do not reflect the 10% increase in general damages for pain, suffering and loss of amenity proposed by Sir Rupert Jackson in his Review of Civil Litigation Costs: Final Report published in December In the review hearing of Simmons v Castle [2012] EWCA Civ. 1039, Lord Judge declared that, in light of these recommendations, with effect from 1 April 2013, the proper level of general damages in all civil claims for (i) pain and suffering and loss of amenity in respect of personal injury, (ii) nuisance, (iii) defamation and (iv) all other torts which cause suffering, inconvenience or distress to individuals, will be 10% higher than previously. 22. This will not only apply to claims for psychiatric injury coming to trial after April 1 but also in all likelihood - to injury to feelings arising from acts of discrimination since these concern the distress suffered as a consequence of a statutory tort. Aggravated Damages 23. Aggravated damages are recoverable where the respondent has behaved in a highhanded, malicious, insulting or oppressive manner in committing the act of discrimination (Alexander v Home Office [1988] IRLR 190). 24. Examples of cases in which damages of this kind might be recoverable include: a) Where an employer has failed to investigate a complaint of discrimination and failed to apologise (Armitage, Marsden and HM Prison Service v Johnson [1997] ICR 275); b) Where the respondent has attempted to cover up and trivialise acts of discrimination (HM Prison Service v Salmon [2001] IRLR 425); c) Where the respondent s conduct in defending proceedings was abusive or intimidatory (Zaiwalla & Co. v Walia [2002] IRLR 697); d) Where the discriminator was not punished and remains in post and was promoted (BT plc. v Reid [2004] IRLR 327, CA) 7

8 25. Awards for aggravated damages are compensatory not punitive and seldom exceed sums of 10,000. Remarks made by Mr. Justice Underhill in Commissioner of Police of the Metropolis v Shaw UKEAT/0125/11 are worthy of note. He expressed doubt as to whether the practice of awarding aggravated damages as a separate head of compensation was a good thing, and recommended that in future such awards might be subsumed into an injury to feelings award. Such an approach, he said, might reduce the risk of the Tribunal being seduced into introducing a punitive element by the back door. Financial Loss 26. The financial losses which a claimant may sustain as a result of unlawful discrimination may take the form of either: a) Loss of financial benefits principally loss of earnings which should be calculated on a net basis (Visa International Service Association v Paul [2004] IRLR 42, EAT); and/or b) Out of pocket expenses. 27. If the employee can establish that his entitlement to dismissal compensation is uncapped, damages are at large. The assessment of future loss inevitably involves elements of speculation but this cannot allow the Tribunal to be deflected from its task; Scope v Thornett [2007] IRLR 155. If an employee suffers career long loss, it is incumbent on the Tribunal to do its best to calculate the loss even where the exercise involves a considerable degree of speculation; Wardle v Credit Agricole Coporation& Investment Bank [2011] IRLR 604. Where the psychiatric injury is serious, it is increasingly common for a claimant to contend that they will never return to a comparable level of employment and, in some cases, to employment at all. Where this is the case, what principles should govern the assessment of loss? 8

9 Fixing a loss period 28. In Kingston upon Hull City Council v Dunnachie (No. 3) [2003] IRLR 843 the EAT sought to give some general guidance, in terms (taken from the headnote report) that:- Use of Ogden tables in calculating unfair dismissal compensation for future loss of earnings should be rare. They should only be relied upon where it is established that there is a prima facie career-long loss. Whether there is such loss should be assessed by reference to old job facts and new job facts. Old job facts include whether the applicant would have remained in the job anyway and, if so, for how long, whether he would have been promoted and whether his earnings would have remained stable. New job facts require the tribunal to ask first whether the applicant would be likely to obtain a new job and, if so, what job would be likely to be obtained, by what date and at what remuneration. The next step is to establish whether there is a pay differential between the old and the new job and, if so, whether that differential would be affected by the applicant getting a better paid job in the future or being promoted or receiving pay increases. The tribunal must not abdicate from the job of deciding what, on a balance of probabilities, is likely to happen, and the Ogden tables, coupled with a substantial discount, should not be a substitute or alternative for such an exercise. 29. In addressing Old Job Facts the first question for the Tribunal is what would have happened but for the unfair or discriminatory dismissal? Would the employee have been fairly dismissed in the near future, come what may? Would he have left of his own accord, or taken early retirement? In Dunnachie it was said that contingencies of more than 50% should lead to a conclusion that a claim for career long loss is inappropriate (para. 30). 30. With regards to New Job Facts in Wardle v Credit Agricole [2011] IRLR 604 the CA suggested that it would be a rare case where it was appropriate to award career long-losses. It was wrong to assess compensation to the point where the Tribunal was sure that the employee would have secured equivalent employment even with percentage discounts to reflect the chance of earlier employment. Once the Tribunal was satisfied that there was a more than evens chance that an employee would have found equivalent employment that should provide the cut off point. Elias LJ observed (at paras.52 and 34): In the normal case if a tribunal assesses that the employee is likely to get an equivalent job by a specific date, that will encompass the possibility that he might be lucky and secure the job earlier, in which case he will receive more in compensation than his actual loss, or might be unlucky and find the job later than predicted, in which case he will receive his actual loss. The tribunal s best estimate ought in principle to provide the appropriate compensation. The various outcomes are 9

10 factored into the conclusion. In practice the speculative nature of the exercise means that the tribunal s prediction will rarely be accurate. But it is the best solution which the law, seeking finality at the point where the court can award compensation, can provide. Exceptionally a tribunal will be entitled to take the view on the evidence before it that there is no real prospect of the employee ever obtaining an equivalent job. In such a case, the tribunal necessarily has to assess the loss on the basis that it will continue for the course of the claimant s working life. Chagger is an example of such a case. By the time the tribunal came to assess compensation in his case he had already been out of a job for some years. The evidence was that he had made every effort to obtain employment in his chosen field, having made countless applications for new employment. There was a suggestion that he had been stigmatised in the eyes of other employers as a result of the manner of his dismissal. He had taken reasonable steps to mitigate his loss by going into teaching. In these circumstances the tribunal was entitled to conclude that he had suffered permanent career damage and should be compensated accordingly. Where such a loss is established, a tribunal has to undertake that task, however difficult and speculative it might be. 31. This chimes with the approach of the EAT in Dunnachie (No. 3). In a career long case, it will be appropriate to apply a discount for accelerated payment, and there might also be a case for an Ogden Tables style reduction for generated contingencies (e.g. mortality and ill-health) if these have not been factored into the selection of the multiplier and period. But substantial contingencies indicate that a claim to careerlong loss is unlikely to be justified. Factors relevant to the assessment of the loss period 32. The claimant s medical evidence and prognosis will be critical to the assessment of the loss period and prospects of future employment. Where a claimant has spent a significant time out of paid employment by reason of a psychiatric illness there may also be force in an argument that they face a stigma in the marketplace (analogous to stigma damages claimed in Chagger v Abbey National Plc. [2010] EWCA Civ. 1202). 33. In Chagger the Claimant argued that despite his best efforts he had failed to secure equivalent employment because he had been honest with prospective employers about the race discrimination proceedings he had brought against Abbey National. Elias LJ held that an employer who has been found to have unlawfully discriminated in dismissing an employee can be liable for compensation reflecting the stigma that 10

11 results from an employee having brought discrimination proceedings against his former employer, notwithstanding the fact that these are the acts of third-parties. Similar principles may apply where the claimant has spent a period of time out of work due to psychiatric ill-health and has to explain this to a prospective employer. 34. As regards computation of stigma loss the Court of Appeal said that in most cases it would not be necessary to award stigma loss as a separate head. It would simply be relevant to the question of how long it will be before a job can be found essentially going to the question of mitigation. Loss of a chance / effect of a future fair dismissal 35. Tribunals are often asked to assess how long a claimant would have remained in their original job for the period of the compensation claim and whether they would have left voluntarily or involuntarily at a later date. Where there is a chance that they would have left the role this should have be reflected in the award, expressed as a percentage to reflect the risk of loss (Ministry of Defence v Cannock [1994] ICR 918). Where there are a number of contingent possibilities the correct approach is to cumulate the percentage chances of each event occurring (Ministry of Defence v Hunt [1996] ICR 544). 36. The fact that the dismissal was discriminatory does not prohibit consideration of the chances that an individual might have been fairly dismissed in any event (Polkey type considerations). In Chagger v Abbey National plc. [2010] EWCA Civ. 1202, the Court of Appeal held that since the unlawful act is the discriminatory ground for dismissal not the dismissal itself, the question of whether the dismissal might still have occurred remains pertinent. 37. In O Donoghue v Redcar and Cleveland Borough Council [2001] IRLR 615, the Court of Appeal held that the tribunal was entitled to find that although Mrs. O Donoghue had been unfairly dismissed and victimised on the grounds of sex, her antagonistic attitude towards colleagues was such that she would inevitably have been fairly dismissed by reason of conduct within six months. The Tribunal was entitled to 11

12 find dismissal was a certainty and that six months was the cut-off date for compensation. 38. However in Chagger the Court of Appeal held that future compensation should not necessarily be confined to the period during which the employee would have remained in employment. Although it was accepted that Mr. Chagger might have left Abbey of his own volition for another post at some point in the future, the employment tribunal had reasonably concluded that he would not have done so until he had secured another post at least as favourable as he held with Abbey. At Paragraphs Elias LJ gave the following guidance: 69. The task is always to put the employee into the position he would have been in had there been no discrimination; that is not necessarily the same thing as asking what would have happened to the particular employment relationship had there been no discrimination. The reason is that the features of the labour market are not necessarily equivalent in the two cases. The fact that there has been a discriminatory dismissal means that the employee is on the labour market at a time and in circumstances which are not of his own choosing. It does not follow therefore that his prospects of obtaining a new job are the same as they would have been had he stayed at Abbey. For a start, it is generally easier to obtain employment from a current job than from the status of being unemployed. Further, it may be that the labour market is more difficult in one case compared with another. For example, jobs may be particularly difficult to obtain at the time of dismissal and yet but the time that they become more plentiful, when in the usual course of events Mr. Chagger might have been expected to have changed jobs had he remained with Abbey he will have been out of a job and out of the industry for such a period that employers will be reluctant to employ him. In addition he may have been stigmatised by proceedings, and that may have some effect on his chances of obtaining future employment. 70. The result of these factors is that the discriminatory dismissal does not only shorten what would otherwise have been Mr. Chagger s period of employment with Abbey; it also alters the subsequent career path that might otherwise have been pursued. 71. It follows that in our judgment the period during which Mr. Chagger would have remained in employment with Abbey had there been no discrimination is irrelevant given that this is a case where he would only leave for another job. The Employment Tribunal concluded that Mr. Chagger would not have left Abbey unless and until he was able to move to a post at least as favourable as his Abbey job. In our view that is a wholly realistic assumption; few employees voluntarily leave employment for a worse paid job. 12

13 Pension Loss 39. In cases where the employee has lost the benefit of a money purchase scheme calculating pension loss is likely to be relatively straightforward. Given current interest rates and the modest performance of invested funds, the loss may not fall to be enhanced much beyond loss contributions. 40. More problematic is the position where the employee has lost the benefit of a final salary pension scheme and is unlikely to be able to replace the benefit even if he or she successfully obtains a new position. 41. Guidance is provided in Compensation for Loss of Pension Rights: Employment Tribunal (3 rd ed) which offers the choice of a simplified approach - appropriate in most cases and a substantial approach which assesses loss of pension on a whole career basis. The Guidance recommends that the latter approach is adopted in cases where employment was otherwise stable, the claimant had been employed for a considerable period of time and they had reached an age where they would not have been moving on to new pastures [Para. 4.13]. 42. It should be noted that where the claimant is within five years of retirement the guidance recommends that there is no compensation for loss of enhancement of pension rights [Para. 5.10] and where the tribunal finds that dismissal would have taken place within one year there should be no compensation for loss of accrued pension rights [Para 5.11]. 43. The Guidance is not mandatory. In Port of Tilbury (London) Ltd. v Birch and others [2005] IRLR 92, the EAT held that it was an error of law for an employment tribunal to proceed entirely on the basis of the booklet and to reject out of hand the evidence and submissions of the parties whether or not they reflected the guidance. The first duty of the tribunal is to consider such evidence and submissions in order to ascertain whether a fair and equitable assessment of loss of pension rights can be calculated on the basis argued. 13

14 Future handicap on the labour market (loss of earning capacity) 44. A Smith v Manchester award compensates claimants for their future handicap on the labour market. It is appropriate where the claimant has no continuing loss of earnings or salary at the date of the remedies hearing or he has a continuing loss fixed at a particular level and in either event the effects of his injuries are such that if he ever lost his current employment he would have difficulty obtaining employment at all or he would only be able to obtain less well-paid employment. 45. A two-stage approach is adopted in assessing damages under this head (Moeliker v. Reyrolle & Co. Ltd [1976] ICR 253,CA): a. Is there a substantial or real risk that a claimant will lose his present job at some time before the estimated end of his working life? b. If there is, then the tribunal must assess and quantify the present value of the risk of the financial damage which the claimant will suffer if that risk materialises (having regard to the degree of the risk, the time when it may materialise, and the factors, both favourable and unfavourable, which in a particular case will, or may, affect the claimant s chance of getting a job at all, or an equally well paid job). Care component 46. In certain circumstances, the severity of the psychiatric illness will have resulted in a requirement for domestic care such as assistance with household tasks, cooking and childcare. Where these are provided gratuitously say by a relative or friend how are they assessed and quantified? 47. Guidance was given by the Court of Appeal in Evans v Pontypridd Roofing Ltd. [2001] EWCA 1657 in which earlier authorities were reviewed including the judgment of O Connor LJ in Housecroft v Burnett [1986] 1 All ER 332 at page 342g: Where the needs of the injured plaintiff are and will be supplied by a relative or friend out of love and affection (and, in cases of little children where the provider is parent, duty) freely and witout regard to monetary reward, how should the court assess the proper and reasonable cost? 14

15 . I have found this a very difficult problem. Once it is understood that there is an element in an award to the plaintiff to provide for the reasonable and proper care of the plaint and that a capital sum is to be available for that purpose, the court should look at it as a whole and consider whether, on the facts of the case, it is sufficient to enable the plaintiff among other things, to make reasonable recompense to the relative. So in cases where the relative has given up gainful employment to look after the plaintiff, I would regard it as natural that the plaintiff would not wish the relative to be the loser and the court would award sufficient to enable the plaintiff to achieve that result. The ceiling would be the commercial rate. 48. As such, a claimant whose spouse or relative has given up work to provide care will not be entitled to claim for that individual s loss of earnings. The entitlement is restricted to the cost of care judged at the commercial rate. Guidance is provided in Facts and Figures published by Sweet and Maxwell which provides schedules of the appropriate rates of pay for carers from year to year depending on the level, location and time when the care is provided. A discount (typically of around 25%) will be applied to reflect the fact that tax and national insurance contributions are not payable on the damages. Tax Considerations 49. Section 401, Income Tax (Earnings and Pensions) Act 2003 ( ITEPA 2003 ) provides: (1) This chapter applies to payments and other benefits which are received directly or indirectly in consideration or in consequence of, or otherwise in connection with- (a) the termination of a person s employment, (b) a change in the duties of a person s employment, (c) a change in the earnings from a person s employment. (2) This chapter does not apply to any person or other benefit chargeable to income tax apart from this chapter. 50. Typically, compensation is calculated net of tax and NI, but then grossed up to reflect the incidence of tax under s.401 ITEPA 2003 on the sum due to the claimant (after taking account of the 30,000 tax free element). These principles are applicable to Tribunal compensation claims as they are to High Court damages claims; Williams v Ferrosan Ltd. [2004] IRLR 607. The applicable grossing up rates should be those prevailing at the date of payment. 15

16 51. The following heads of loss will be exempted from income tax because they do not constitute earnings within the meaning of s.62 ITEPA 2003: a) Injury to feelings (in so far as it arises in the course of employment Orthet Ltd. v Vince Cain [2004] IRLR 857) b) Psychiatric Injury c) Care past and future d) Interest on all but earnings e) Medical treatment Exemptions 52. An extra-statutory concession is available to make settlements of disputes more taxefficient by giving an exemption from tax for payment by the employer of the employee s legal costs. This is of particular value where the settlement exceeds 30,000 and the other means of delivering the excess tax-efficiently are not available. As part of a general rationalisation of extra-statutory concessions, ESC A81 has now been converted to a statutory exemption from the tax on termination payments by s.413a ITEPA Section 413A exempts from tax a payment by the (ex) employer of all or part of the legal costs incurred by the employee exclusively in connection with the termination of the employer s employment subject to the further condition that the payment is made directly to the employee s lawyer, and is made either under the order of a court or tribunal or in accordance with a compromise agreement meeting the conditions of s.203 ERA Two limitations apply: a) The exemption does not apply to the payment of costs incurred in proceedings that do not relate to the termination of employment; and b) The exemption does not apply if the settlement is effected by way of a COT3 agreement. 16

17 55. A further exception exists under s.406(b) ITEPA 2003 which provides an exception for payments or benefits provided in connection with the termination of employment on account of injury to, or disability of, an employee. 56. In certain circumstances this will permit the parties to reach a settlement via a compromise agreement where the employer agrees to make a payment in accordance with s.406(b) ITEPA 2003 which is exempted from income tax. 57. Whilst this does not necessarily require the employer to make an admission of liability, it will need to accept that: a) The employee is now suffering from a medical condition which by the date of termination prevented them from carrying out their duties; b) The employee has suffered a serious injury which may prevent them from working to the same level again. 58. It is recommended that the compromise agreement is drafted to include relevant extracts from the medical reports (and findings of fact by the tribunal if liability has been determined) and submitted to HMRC for clearance in advance. 17

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