HR Two Minute Monthly: Holiday pay; reasonable adjustments; tax on termination


Posted by , on

Summary: Our November update includes the landmark EAT decision on holiday pay, the duty to make reasonable adjustments when dismissing for sickness absence, two cases on the tax treatment of termination payments and a case where seven deposit orders were made against a claimant. It also includes details of the EBA's Opinion which warns that many role-based allowances used in the banking sector are variable rather than fixed remuneration.

Holiday pay – what does the EAT decision mean for you?

Overtime which a worker is not entitled to turn down should be included when calculating holiday pay, according to the EAT in the combined cases of Bear Scotland v Fulton, Hertel v Wood and Ors. However, although this is good news for workers, the EAT also found that the ability to recover historic underpayments is limited, with a three month break in payments breaking the chain for the purposes of any unlawful deductions claim. Unless the cases settle, there is a strong chance that this decision will be appealed.


Disregarding final written warning for sickness absence was not a reasonable adjustment

The EAT decision in General Dynamics Information Technology v. Carranza highlights that there are limits to an employer’s duty to make reasonable adjustments for a disabled employee. The EAT said that it was not a reasonable adjustment for an employer to ignore a final written warning for sickness absence, when it subsequently decided to dismiss the employee for further absence.

Reasonable adjustments must involve practical steps, not just mental reasoning

This case is helpful because it emphasises that reasonable adjustments are practical steps that the employer can take to avoid the disadvantage caused by the disability. Whilst formally revoking a final written warning might be such a practical step, the mental process of simply disregarding a final written warning isn’t a reasonable adjustment.


And the employer was not required to revisit its previously issued final written warning


The employee also argued that his dismissal was unfair because the employer should have revisited whether the prior final written warning had been properly given. The EAT emphasised that an employer is not generally required to reopen its decision to issue a warning. Revisiting what took place at an earlier stage would only be appropriate if the warning was allegedly issued in bad faith, manifestly improper, or issued without any prima facie grounds.




Final salary pension liabilities can be very significant


The Court of Appeal has considered the current approaches used for the calculation of pension loss. The current employment tribunal guidelines use two approaches: the simplified approach which is based on the contributions an employer would have made during the period of loss and which should be used in most cases; and the substantial loss method, which applies a more detailed calculation based on actuarial tables.


Employee challenges level of compensation awarded in her successful disability claim


In Griffin v Plymouth Hospital NHS Trust, the claimant succeeded in a disability discrimination claim. She was awarded £105,643. Following an appeal, this amount was increased to £166,595 but she still believed this was too low and appealed again. A key issue was that the employment tribunal had calculated her pension loss using the simplified approach, rather than the substantial loss approach. The latter approach gives a more appropriate assessment of pension loss where there is a good chance the individual will remain in employment until retirement.

The Court of Appeal agreed with the employee that the substantial loss method should have been used in her case. The employment tribunal had focused on a section of the guidance which suggested the substantial loss approach was only appropriate where an individual had been employed for a “considerable time”, which it considered meant that they had to be close to retirement. The Court of Appeal disagreed. Most final salary pension schemes are now closed and the employee was unlikely to be able to mitigate the loss of this valuable benefit. It was therefore appropriate for the substantial loss method to be used here.


Pension loss guidelines need updating


The Court of Appeal noted that the employment tribunal guidelines for calculating pension loss were published in 2003 and that priority should be given to updating them.

This case suggests that where an employee was a member of a final salary scheme and was likely to have remained with the employer, the substantial loss method is the correct one. Further, given that discrimination compensation is uncapped, the sums involved in this case highlight just how costly discrimination claims can be when final salary pension loss is taken into account.




Tax on a post-termination buy out payment


In Forsyth v. HMRC, the First-tier Tax tribunal assessed a payment made to an ex-employee in connection with the buy-out of his healthcare scheme membership. Mr Forsyth remained in his employer’s healthcare scheme following termination of his employment. A number of years later, the employer bought out this right for a one-off payment of £29,783, which was paid subject to a compromise agreement. The employee’s accountant claimed this was a payment of capital rather than income. HMRC disagreed and said that it was subject to income tax as a payment under an “employer-financed retirement benefits scheme”.

The Tax Tribunal agreed with HMRC. The definition of a relevant scheme was broad enough to cover a payment made under a compromise agreement and the sum was paid in connection with Mr Forsyth’s employment, as the payment would not have been made but for his employment. Accordingly, the sum was subject to income tax and, since it fell under a section other than s401 ITEPA, the usual £30,000 exemption did not apply.

This case follows the recent Moorthy v. HMRC tax decision (considered in our October 2014 Two Minute Monthly newsletter), and suggests that in this area the Tax Tribunals are taking an HMRC-friendly stance when it comes to the tax treatment of termination payments.




Bonus clawback entitled employee to claim income tax relief


In Martin v. HMRC, the Upper Tribunal held that an employee was entitled to claim income tax relief on the repayment of a proportion of his signing-on bonus when he resigned not long after joining the employer. The employee had to repay the sum under a clawback clause in his contract of employment. The Tribunal said that he was entitled to treat the repayment as negative taxable earnings, which he could set off against other income he had earned.


No such tax relief if the clawback arrangement is a liquidated damages clause


The Upper Tribunal made clear that this ‘negative taxable earnings’ treatment only applies where the true character of the repayment is not damages, but rather a straightforward contractual provision to give back to the employer a proportion of the sign on bonus paid to the employee for a commitment which the employer did not, in fact, receive in full.

This is a helpful Upper Tribunal decision, given the increasing use of clawback provisions, especially in the financial services sector. Up to now, clawback provisions have typically been drafted to provide for repayment on a net of tax rather than gross basis, because the employee only ever receives the net payment. In light of this case, provided the clawback provision is not a liquidated damages clause, employers may wish to consider whether it is appropriate to provide for clawback on a gross basis.




Liability for bringing disciplinary proceedings


Can an employer breach its duty of care to an employee simply by bringing disciplinary proceedings, even where the proceedings subsequently exonerate her? In Coventry University v Mian, the Court of Appeal said that it had not breached its duty of care.


False and misleading reference


The case concerned a false and misleading reference for an ex-employee of the University, apparently given by Dr Mian. The new employer who received the reference complained about its inaccuracy. Initial investigations suggested that there was a case to answer and the University started disciplinary proceedings against Dr Mian. She went off sick and did not return to work. At the disciplinary hearing, the allegations against her were dismissed.

The High Court held that the employer had breached its duty of care by instituting the disciplinary proceedings. This decision was overturned by the Court of Appeal. The correct test was whether the decision to institute proceedings was outside the range of reasonable responses. This was an objective assessment at the time the decision was taken.


Implications for employers


The decision is interesting for two reasons. First, while the employer was not in breach in this case, it is an important reminder to employers that liability can arise from a decision that there is a case to answer. It is therefore important to ensure that employers exercise care at every stage of a disciplinary process, not just when the final decision is taken. Second, this is a case where an employer received a complaint about a post-employment reference. Although the circumstances surrounding the giving of the reference in this case proved contentious, it is a useful reminder that inaccurate references may give rise to liability for the previous employer. It is therefore important to have a policy in place specifying who may give references on behalf of the employer, and the parameters of what such references may contain.




Claimant with weak case receives seven deposit orders and has part of claim struck out


The EAT confirmed in Wright v. Nipponkoa Insurance (Europe) Limited that an employment tribunal was entitled to order separate deposit orders for each of seven of the claimant’s discrimination/whistleblowing allegations that had little reasonable prospect of success. This can be contrasted with the old employment tribunal rules in force until July 2013, which provided that a deposit order could be made only if the claim as a whole (rather than individual allegations) had little reasonable prospect of success. The claimant in this case was ordered to pay £2,100 in total (£300 per deposit order) which the EAT said was appropriate, taking into account the number of allegations to which the orders related and the claimant’s means.

The employment tribunal also struck out two other discrimination allegations. A discrimination allegation should not normally be struck out when material facts are still in issue, but the EAT confirmed that it was appropriate in this case for the employment tribunal to strike out the two allegations in question as they had no prospect of success at all.




Failure to go through early conciliation process before filing ET1 was remedied on reconsideration by tribunal


Thomas v. Nationwide Building Society is one of the first reported employment tribunal decisions on the application of early conciliation (EC) rules and highlights the type of satellite litigation that we can expect to see regarding the operation of the EC regime. The claimant in this case said in her ET1 that she was exempt from going through EC, when in fact she should have gone through the EC process first. The EC regime provides that a tribunal may reject the claim in this situation. However, in this case the Judge allowed the claimant to remedy the defect - she had since quickly gone through the EC procedure and applied to the Judge for a reconsideration of the rejection of her claim. The claim was treated as having been properly filed on the day the EC process ended.




EBA Opinion warns many role-based allowances are variable rather than fixed remuneration


In the latest development in bankers’ remuneration reforms, the European Banking Authority has published an Opinion and Report on ‘role-based allowances’, setting out its view on when such allowances are in fact variable remuneration rather than fixed remuneration.

Having reviewed examples of role-based allowances in 39 institutions which represent a material part of the European banking sector (and the investment banking sector in particular), the EBA’s view is that the majority of such allowances should be reclassified as variable remuneration. This is usually because such allowances are discretionary and so can be adjusted or withdrawn unilaterally by the institution, but it may be that the allowances do not have other necessary characteristics identified by the EBA to qualify as fixed remuneration.

The reclassification of many role-based allowances as variable remuneration has a significant impact on whether financial institutions are complying with the Remuneration Code, in particular the bonus cap. The EBA expects institutions to change their remuneration policies in light of its Report. It also expects the UK regulators to use all necessary supervisory measures to ensure that these changes are implemented by 31 December 2014.




Government publishes further regulations implementing Shared Parental Leave and other changes to family friendly rights


The Government has published various draft statutory instruments fleshing out the new shared parental regime and implementing other publicised changes to family friendly rights. Among other things, the new draft regulations will:










    • extend the existing EU right to unpaid parental leave to parents with children aged between five and eighteen
    • extend rights to adoption to those who foster children under a ‘fostering for adoption’ scheme, and
    • extend paternity, adoption and shared parental leave rights to intended parents of a child born to a surrogate, provided the intended parents apply for a Parental Order and satisfy certain conditions.





Acas publishes Shared Parental Leave good practice guide


ACAS has produced a helpful guide for employers and employees giving a general overview of Shared Parental Leave and suggesting good practice. The guidance includes examples of how the different aspects of the new regime will operate in practice.


Stay informed

Sign up to receive email alerts from our award winning Expert Insights team

Sign up now

See more insights by category

We have placed cookies on your device. This site uses cookies to help us manage and improve the website, your browsing experience, and our related services, the material/information we send to our subscribers. For further information about cookies, including how to change your browser settings to no longer accept cookies, please view our Privacy Notice.
Otherwise we will assume you are OK to continue.