3 Frequently Asked Questions on Compromise Agreement – How Much…(Part 2)

(Newswire.net — February, 28  2013) Milton Keynes, UK — When an employee knows that their time as an employee with a company is up, maybe it’s because the company is shedding jobs or perhaps because a strain is developing in the relationship with the employer, the most important question on most employees’ minds is how much can one get to come out of the employment contract.

We looked at this in some detail in part 1 to this editorial series. But bear in mind your employer is not legally obliged to offer you a compromise agreement with a financial sweetener.

Similarly, an employee is not legally obliged in accept a compromise agreement. In fact in a previous editorial, we stated that unless the financial deal offered was in excess of any legal minimum entitlement, it would not be in the employee’s interest to sign away legal rights in a compromise agreement.

If you missed part 1 to this editorial and would like a better understanding of an employee’s potential entitlement on the termination of contract, you can read that editorial here, entitled “3 Frequently Asked Questions on Compromise Agreement – How Much…?“

Having addressed that first question in some detail in part 1, we now turn to 2 further frequently asked questions that impact on the amount that an employee receives on the termination of their employment contract.

Compromise Agreement – How Much Will It Cost?

A compromise agreement is an agreement drafted for the benefit of the employer since the core purpose of the agreement is to obtain a promise from the employee that he or she will not sue the employer at the end of the contract.

As the agreement is for the benefit of the employer, it will often agree to make a contribution of between £250 and £500 for the employee to obtain legal advice.

Independent legal advice is a legal requirement of compromise agreements without which the agreement is not legally binding and is unenforceable in the event of breach.

Many solicitors will agree not to charge the employee beyond the employer’s contribution. However, in a small minority of cases where there are complex contractual issues and high values at stake, or where significant re-negotiation is needed to reach a final settlement, the solicitor will frequently negotiate a higher fee contribution from the employer before undertaking any work.

An employee however, should always confirm with their solicitor that the employers’ contribution for legal advice on a compromise agreement will sufficiently cover all legal fees.

Compromise Agreement – How Much Tax Do I Pay?

As with advising on how much an employee is entitled to on termination of a contract of employment, advising on an employee’s tax position will often vary from case to case.

Generally speaking HM Revenue and Customs treats “compensation” payments for “loss of office” as exempt from tax on the first £30,000 of compensation, which excludes all payments due under the contract of employment such as salary, bonuses and car allowance to the date of dismissal, and including all notice period.

The tax office expects the employer to deduct all tax due in the normal way through the PAYE and NI scheme including any and all notice pay.

Employees however, need to be alert to the fact that within the terms of the compromise agreement, an employee gives an indemnity for any tax that may be  due on all termination payments made to employees. If in doubt an employee should speak with his solicitor to clarify the tax position.

For more detailed guidance on the HM Revenue and Customs’ position on compromise agreement settlements you might like to take a look at the Newswire editorial entitled “Compromise Agreement Tax Implications – Minimizing Your Tax Liability“, which takes a closer look at compromise agreement tax.

If you require more information and guidance and answers to other frequently asked questions, head over to www.cardonaandco.co.uk/compromise agreement or pick up the phone and speak with Mr Cardona who will be more than happy to answer any questions you may have.