Monthly Archives: February 2015

Termination payments to employees who have worked abroad

Where an employee who receives a termination payment, has worked abroad for an employer or (provided that the termination payment is in respect of the whole period of his employment with the group) for a company which is part of the group which the employer belongs to, he might be eligible for either:

  • Foreign Service Exemption; or
  • Foreign Service Relief.

The expression “foreign service” has a complex definition in the tax legislation.  The definition varies according to the tax years covered by the employment and was more generous for employees for the tax years up to and including 2012-13. For the tax years up to and including 2012-13 if an employee, although working in the UK, was not at the time “ordinary resident” in the UK for tax purposes (often the case in the early years after posting, if the employee was an “ex pat” posted to the UK) then he was within the definition of being on “foreign service”.  The employee who was ordinary resident in the UK for tax purposes must have been working abroad for the period to count as foreign service.  For the tax year 2013-14 onwards no period of employment in the UK can count as foreign service regardless of the tax status of the employee (the concept of ordinary residence was abolished for the tax years starting after 5th April 2013).

Foreign Service Exemption

If an employee is eligible for Foreign Service Exemption then the whole of his termination payment will be able to be paid to him free of tax.  There are three alternative tests which an employee has to meet so as to be eligible for Foreign Service Exemption.  The employee only has to meet one of the three tests.  These three tests are:

  • the foreign service must cover three quarters or more of the employee’s whole period of employment (which can be of any length) ending on the date of termination of his employment; or
  • if his period of employment ending on the date of termination exceeded 10 years, the whole of the last 10 years must be foreign service (there must be foreign service continuously throughout the final ten years of employment); or
  • if his period of employment ending on the date of termination exceeded 20 years, then one half or more of the period of employment including any 10 (not necessarily continuing) of the last 20 years must be foreign service.

Foreign Service Relief

If the employee cannot meet any one of the three tests so that the whole of the termination payment can be paid to him tax free, then he might be eligible for foreign service relief.  Under foreign service relief the amount of the termination payment above £30,000 (assuming that the £30,000 exemption for payments made in connection with the termination of employment applies) is pro-rated.  The length of time during which the employee worked abroad (so as to be within the definition of foreign service) is compared to the employee’s total period of employment in order to calculate the proportionate part of the termination payment which attracts foreign service relief.

Foreign service relief applies in the manner shown by the following example.  The example assumes that an employee has been in employment for 5 years and worked abroad for 2 out of those 5 years and received a termination payment of £100,000:

     £
Termination Payment 100,000
Less: exemption (30,000)
  70,000
Less: foreign service relief

70,000 x 2/5

(28,000)
Taxable amount  £42,000

As soon as the amount of the termination payment has been agreed, the employee should raise the question of foreign service with his employer so that the employer can take account of it when operating PAYE on the termination payment.

This is a complicated area and the employee should take specific tax advice from specialist tax advisers if he has worked abroad for his employer.

 

Amending the Territory – Principals be alert, Agents be aware!

Although the relationship between a commercial agent and his principal should be one of collaboration, after a while a tension often creeps in when the principal feels that the agent has become lazy and is not doing enough to promote his products.  The principal then has a problem.  If he ends the agency, perhaps to appoint his own sales force in place of the agent, he faces a substantial risk of having to pay out compensation or an indemnity under the Commercial Agents (Council Directive) Regulations 1993 (“the Regulations”).

One way in which the principal might have tried to protect himself against this is by including in the agency agreement a provision for him to amend the territory if he feels that the agent is not doing enough.

The Regulations provide that the principal cannot exclude the agent’s right to a compensation /indemnity payment on termination.  The exact wording in the Regulations (Regulation 19) is that “the parties may not derogate from [the agent’s right to a compensation/indemnity payment] to the detriment of the commercial agent before the agency contract expires”.

How does a clause which gives the principal the right to reduce the territory, fit in with the prohibition that a principal cannot get out of having to make a payment upon termination by excluding in the agency contract the agent’s right to receive such a payment?  The question came up in 2006  in a case called Vick v. Vogle-Gapes Ltd. Mr Vick was the agent for Vogle-Gapes Ltd.  Vogle-Gapes Ltd was not satisfied with Mr Vick’s performance.  The agency agreement provided that if in their reasonable discretion Vogle-Gapes Ltd believed that Mr Vick was failing to maximise sales opportunities within his territory they could amend the territory. This is what they did.  Mr Vick brought a claim for compensation.

The case did not in fact turn on the reduction in territory point but, rather, whether Mr Vick had by his behaviour treated himself as no longer being bound by the agency so that the company were not required to pay him compensation (this was the finding which the Court made and Mr Vick failed in his compensation claim).  However, one point of discussion in the case was the reduction in territory point.

There was a discussion that by reason of the company varying Mr Vick’s territory, Mr Vick could treat the agency as at an end and claim compensation.  The argument for Mr Vick was that the Regulations (Regulation 19) prevented the parties from derogating from the agent’s right to a compensation/indemnity payment on termination.  His point was that if there had not been an express right in the agency agreement to reduce the territory, the only way in which a reduction in his territory could have been achieved was by a termination of the agency agreement and the substitution of some other agreement.  On the termination of the agency agreement, the compensation/indemnity payment would have become payable under the Regulations.  Mr Vick’s argument was that because the express clause in the agreement enabled something to be done which otherwise could not be done without terminating the agency agreement, the clause served to derogate from his right to compensation.  Regulation 19 prohibited this.  Mr Vick’s argument was not accepted.  It did not seem to the Court that it was a derogation from a right to compensation upon the termination of a contract, for the parties to agree to a provision in their contract which did not involve termination (but which, if they had not agreed it, the situation covered by the express clause could only have come about by the parties making some further agreement).  Thus if the agency agreement when made had not included an express right to vary the territory, that provision could have been added later by agreement between Mr Vick and the company without terminating the agency agreement.   The Court accepted that (if the agency agreement had not included the express clause) what the company could not have done was unilaterally modify the territory.  However it went on to state that this did not mean that by agreeing the express clause in the first place as part of the consideration for the making of the agency agreement, the parties therefore derogated from Regulation 17 (Regulation 17 being the Regulation which gives the agent the right to a compensation/indemnity payment on termination).

A principal must act dutifully and in good faith so that any decision made by a principal to reduce the territory must be both genuine and rational, e.g. allowing the agent more time to devote to customers whom he was left to service.  If the reduction was shown to be made in bad faith as a device to avoid having to make a compensation/indemnity payment, the strategy would fail and if the agent chose to treat the reduction as entitling him to treat the agency as at an end, the principal would likely end up having to make a compensation/indemnity payment.

From the principal’s point of view the inclusion of a clause allowing him to amend the territory would at the very least give him a good negotiating position to deal with an agent whom he feels is not pulling his weight.  From an agent’s point of view he should resist a clause in an agency agreement which gives the principal the right to vary the extent of the territory so that the principal (short of trying to come to an agreement to reduce the territory) faces the choice of either doing nothing or of terminating the agency and possibly facing a compensation/indemnity claim from the agent.

Settlement Agreement FAQs

A Settlement Agreement is a contract between the employer and employee in which the employee waives, withdraws and/or agrees not to pursue any employment claims against his or her employer.  In return the employer pays the employee a sum of money to induce him or her to enter into the contract.  Whether the payment represents a good deal for the employee depends on a number of factors, such as whether the employer has a potentially fair reason to dismiss the employee, the employee’s contractual entitlements and how long it will likely take for the employee to get another job.

Settlement Agreements are often presented to an employee following a dispute.  Also employers often use Settlement Agreements when making employees redundant if they are paying the employee an enhanced redundancy payment.

Why do you need to see a solicitor?

Under a Settlement Agreement an employee agrees to waive all potential claims which he or she may have, including those which they may be unaware of.  Therefore the law requires the employee to take advice and have the Settlement Agreement signed off by a ‘relevant independent adviser’ for it to be binding.

What claims are settled by the agreement?

Most employers include a lengthy list of claims which are potentially compromised, most of which are usually irrelevant.  However claims that should not be compromised include accrued pension rights (if the employee is a member of a pension scheme) and personal injury claims.   If these claims are not expressly excluded from the Settlement Agreement then we would seek to amend the Settlement Agreement to exclude them.

What happens to my salary, holiday and notice pay?

Employees should be paid their salary and any accrued but untaken holiday as well as their remaining entitled to any employee benefits up to the date of termination.  These payments are subject to income tax and national insurance deductions in the normal way.

An employee may also receive pay for his or her notice period if the employer does not require the employee to work his or her notice.  If the employer agrees to pay the employee in lieu of his or her notice, then whether this notice pay is taxable depends on whether the employee’s contract of employment has a pay in lieu of notice clause in it.  If it does, then the notice pay is subject to deductions.  If it does not, then, as there is no pay in lieu of notice clause in the employment contract, the payment is viewed as not being paid under the terms of the employment contract.  Indeed it is viewed as damages paid by the employer for not allowing the employee to work the notice period and can arguably be paid gross (subject to a £30,000 cap – see below).  However, Her Majesty’s Revenue and Customs (HMRC) have said that if all employees receive a pay in lieu of notice every time there is a termination, then the payment should be taxed (even if the contract of employment contains no pay in lieu of notice clause).

Is the settlement/termination payment taxable?

The first £30,000 of a termination payment can be paid to the employee without deduction of income tax and national insurance.  Any sum over £30,000 is then subject to deductions in the normal way.

What happens if I breach the agreement?

Put simply the ex-employer would be able to sue the employee for damages for the losses which it has suffered because of the breach.  Often there are specific clauses in the Settlement Agreement which set out that if an employee breaches the agreement (e.g. makes a derogatory comment, breaches the confidentiality provisions or goes ahead and brings a claim again the employer) the employee will have to repay the whole sum or a proportion of the money paid under the agreement and often the employer’s legal costs. There may be arguments, depending on the wording, that the repayment clause is a penalty and therefore unenforceable.

Common Settlement Agreement Clauses

Tax Indemnity

Invariably there will be a tax indemnity clause.  This states that the employee agrees to indemnify the employer in respect of any income tax and employee’s national insurance contributions payable on the termination payment and indeed often on all of the monies paid under the Settlement Agreement.  The indemnity may be triggered if HMRC finds upon investigation that sums which were paid to the employee free of deductions (within the £30,000 threshold) should have been taxed.  Under the indemnity clause in the Settlement Agreement the employer can seek from the employee the amount of income tax and employee national insurance contributions which HMRC asks it to pay (and often, interest, penalties, fines and costs as well). This indemnity should not extend to tax that the employer has already deducted.

Confidentiality

There is often a confidentiality clause that you and your employer will keep the content of the Settlement Agreement confidential.  Common exceptions on the part of the employee are that he or she can discuss the agreement with his or her spouse/partner/immediate family/legal representative or as may be required by law.

Non-Derogatory Comments

Most Settlement Agreements include a clause which prevents you making derogatory or disparaging comments about your employer and this usually also extends to your not making these types of comments about their officers and employees.  However, this is a clause which we would expect to be mutual in that your employer, or perhaps some named individuals at your employer, should agree not to make derogatory or disparaging statements about you.  The employee will not give an absolute commitment but will commonly agree to use its reasonable endeavours to ensure that its employees will not make this type of statement about you on the basis that it cannot be expected to “police” what each member of its workforce might say (whereas you agree not to make the statements because you can control what you say).

Entire Agreement Clause

Most Settlement Agreements have an “entire agreement” clause.  This says that the Settlement Agreement supersedes all previous agreements/negotiations that the employee has entered into.  In other words if you have been told something on which you place importance and it is not referred to in the Settlement Agreement then you will have no recourse if the employer does something which it said that it would not do or does not do something which it said it would do.  The “entire agreement” clause will also prevent you from arguing that, although not set out in the Settlement Agreement, it was implied that your employer would do/not do something.

Reference

It is standard to have an agreed reference annexed to the Settlement Agreement.   The majority of employers as a matter of course are only prepared to give standard references simply detailing the job you did and how long you worked for the employer.  Any reference commenting on your character, performance and achievements would have to be individually negotiated.

Other points

Please make us aware of any of the following, if they apply to you:-

  • If you are a Director and/or have shares or share options in your employer’s business
  • If you have restrictive covenants in you contract of employment
  • If you are currently off sick and have the benefit of permanent health insurance
  • If you are pregnant
  • If you have raised any grievance against your employer.
  • If you have worked abroad for part of your period of employment.

When meeting with us, please also bring with you a copy of your Contract of Employment and any other documents you consider relevant.

 

Disclaimer – for the avoidance of doubt these FAQs do not constitute legal advice but simply guidance on issues commonly arising.