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You are here: BAILII >> Databases >> United Kingdom Special Commissioners of Income Tax Decisions >> SCA Packing Ltd v Revenue & Customs [2006] UKSPC SPC00541 (23 May 2006) URL: http://www.bailii.org/uk/cases/UKSC/2006/SPC00541.html Cite as: [2006] UKSPC SPC00541 |
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SPC00541
Payments in lieu of notice - whether made pursuant to a right of employer to give short notice - whether made pursuant to a contractual right of the employee - whether made for abrogation of contract - incorporation of Written Statement and of collective agreements into a contract - terms apt for incorporation - source of payments: whether from employment: section 19 ICTA 1988 - whether derived from employment - section 3 Social Security Contributions and Benefits Act 1992.
THE SPECIAL COMMISSIONERS
SCA PACKAGING LIMITED Appellant
- and –
THE COMMISSIONERS FOR HER MAJESTY'S REVENUE & CUSTOMS Respondents
Special Commissioner: Charles Hellier
Sitting in public in London on 8 and 9 March 2006
Kevin Prosser Q.C. and Clive Sheldon of Counsel instructed by Clifford Chance LLP - for the Appellant
Bruce Carr instructed by the Acting Solicitor for HMRC for the Respondents
Introduction
(i) employees who commenced employment in and after 1992 who were not office staff;
(ii) employees who commenced employment before 1992 and who were not office staff;
(iii) office staff;
Under this heading I shall deal with each of the three classes of employee, and whether or not the relevant terms, if not expressly incorporated, were incorporated by custom and practice.
Under this heading I shall consider (a) payments in lieu made to employees in respect of whom there had been express incorporation of the relevant terms of the Memorandum of Agreement into their contracts, (b) payments, where any incorporation of those terms derived from custom and practice, and (c) payments made otherwise than in connection with provisions in the contract of employment.
The Appeal
- Notices of determinations (under regulation 80 SI 2003/2682) on income tax due on termination payments in the following amounts:
- 1996 - 1997 £30,000 (estimate)
- 1999 - 2000 £12,115.25
- 2000 - 2001 £5,312.78
- Notices of decision (under section 8 Social Security Contributions (transfer of Functions etc) Act 1999) on National Insurance contributions due on termination payments in the following amounts:
- 1996 - 1997 £9,807.76
- 1999 - 2000 £9,305.06
- 2000 - 2001 £3,749.79
Other facts
Apart from the facts noted above I find the following facts.
1. Were any of the terms of the Memorandum of Agreement incorporated into the employees' contracts of employment?
(i) Employees who commenced employment in and after 1992 who were not office staff.
"I have received and understood the statement, concerning my terms and conditions of employment in accordance with [the relevant Act]",
and space for the employee to sign under that statement and to date his or her signature. I note in particular the words "and understood". I do so because in other cases before other courts to which I was referred the employee was asked to sign a statement merely to "acknowledge receipt" of the Written Statement. In six of the examples in the bundle (Mr Badcock, Eva Stanley, Avril Ferrari, James Corstorphine, Ian MacDonald and Charles Baikie) the Written Statements had been signed by the employees; in one case (that of Mr Kramer) the copy in the bundle was not signed. With the exception of Mr Corstorphine the signatures were dated before, or within a week after, the commencement of the employment.
"1. Your main terms and conditions of employment whilst employed by this Company will be in accordance with the provisions set out in:
(a) The National/Local Agreements currently in force with the appropriate trade unions, and/or
(b) Appropriate sections of the Company Reference File, and/or
(c) Letters offering employment.
Copies of these documents as well as [various Acts] are available in the Personnel Department/Works Office…
"2. The terms and conditions of employment referred to above are concerned with the following matters as may be appropriate:
…10) Details concerning redundancy rights and procedures.
Any changes in these and other matters will be incorporated in the appropriate documents and the Company undertakes to keep these documents up-to-date.
"3. You are entitled to receive and are required to give notice of termination of employment in accordance with:
(a) Your agreement with the Company; or
(b) The provisions of the [relevant Acts];
whichever is the longer.",
although in some cases the statement was more specific as to the exact notice period to be given or received.
"Redundancy
If you were employed at 17 July 1992, you will be entitled to the redundancy terms set out in the attached Appendix for the transition period up to 31 December 1993.
Thereafter your redundancy terms will be as set out in the Manual of Agreements…
Other Terms and Conditions
Other terms and conditions of employment will be as set out in the Manual of Agreements…
Any provision stated above or in any subsequent addendum which is different from corresponding provision in the Manual of Agreements shall modify or replace as appropriate the provision of the Manual.
Changes to Terms and Conditions
You will be notified of changes to any of the above terms and conditions following joint discussions between the Company and the unions."
(i) the employer taking steps to minimise the need for redundancy;
(ii) consultation with the unions over redundancy;
(iii) selection of employees for redundancy; and
(iv) redundancy terms.
"Scope
Agreement applies to all staff and hourly paid employees in SCA Packaging Ltd whose terms and conditions are governed by the "Bexhill" Manual of Agreements. It excludes those employees on a fixed term or temporary contracts of employment.
"5.7 Redundancy TermsGeneral
…Redundancy payments will be based on complete years of continuous service as at the last day of service. When notice is paid in lieu, then the individual's last day of service will be extended to include the notice period.
Notice will be based on 1 week for every year of continuous service up to a maximum of 12 weeks or the individual's contractual notice period whichever is the greater.
5.8 Severance Payments for Existing Employees
Existing employees are defined as those who are in [SCA's] employment as at 31.12.91.
Redundancy payments will be based on 3 weeks' pay (2 plus 1) for each complete year of continuous service. The additional one week's pay will only be paid in the event of co-operation from employees in achieving an orderly run down of the business and reduction in the number of employees.
Payment will also be made of any unexpired period of notice as at the date of termination.
Severance pay will be subject to a maximum of 2 years (104 weeks) pay or the number of weeks to normal retirement date whichever is the less.
5.9 Transitional Arrangements
In recognition of the fact that other employees of [SCA] have left [SCA] on redundancy terms which were more generous in some respects than the terms set out in this Agreement, [SCA] is prepared to make the following ex gratia payments to individuals with long service employed by [SCA] as at 31.12.91 who are made redundant at some point in the future.
Complete years of service at 31.12.91 Ex gratia payment Less than 5 years £ 500 5 years or more, but less than 10 £1,000 10 years or more, but less than 15 £1,500 15 years or more, but not less than 20 £2,000 20 years or more, but not less than 25 £2,500 25 years or more £3,000 The maximum limits referred to in para 8 above will still apply i.e. no employee will receive in excess of 104 weeks pay inclusive of redundancy, pay in lieu of notice and ex gratia payment.
5.10 Severance payments for New Employees
New employees are defined as those who join [SCA] after 31.12.91.
Redundancy payments will vary according to length of service. Once the length of service qualification has been met, the higher redundancy entitlement will apply for each year of service.
Less than 5 years Continuous ServiceRedundancy payments will be based on 2½ weeks pay for each complete year of service.
5 years of more Continuous ServiceRedundancy payments will be based on 3 weeks pay for each complete year of service.
Severance pay i.e. redundancy pay plus notice paid in lieu will be subject to a minimum payment of 4 weeks pay i.e. no one will receive any less than 4 weeks pay on termination.
"It provides very strong prima facie evidence of what were the terms of the contract between the parties but does not constitute a written contract between the parties. Nor are the statements of the terms finally conclusive: at most they place a heavy burden on the employer to show that the actual terms of contract are different from those he has set out in the statutory statement."
(i) they were provided by the employer and imposed a heavy burden on the employer to show that the actual contract terms were different;
(ii) there were no other contractual terms in other documentation before me which were at variance with the statements;
(iii) with one exception they were signed as received and understood by the employees, and in all such cases, save one, were so signed close to the start of employment or before the employment commenced; as such they are persuasive evidence that the employee considered the terms to be part of his or her contract.
(i) a collective agreement between an employer and unions is not legally enforceable between the parties unless the agreement expressly so provides. I note that there was no such provision in the documents before me;
(ii) nevertheless provisions of such an agreement can form part of the legally enforceable contract between the employee and the company;
(iii) such provisions may form part of that contract if they are expressly incorporated into it or if the evidence otherwise establishes the mutual intent that they be incorporated (by "custom and practice" or otherwise);
(iv) but even where terms of such an agreement are incorporated the question arises as to whether all the provisions of the collective agreement are to be treated as part of the employment contract;
(v) a specific provision in a collective agreement which is not expressly incorporated (although there may be express incorporation generally of the collective agreement) into the employment contract will be a term of that contract only if it is "apt" to be a term of that contract;
(vi) in determining whether a provision is so apt, terms which do not relate directly to the relationship between the employer and the employee (such as an obligation on the employer to consult with unions, or an agreement on behalf of the employer to give consideration to various matters are generally inapt for incorporation, whereas terms which relate directly to the relationship between the two (such as provision for wages, bonus or working time) are generally apt for incorporation.
(i) hours of work;
(ii) holiday entitlement;
(iii) pension scheme rules;
(iv) sickness payments;
(v) works rules;
(vi) safety policy;
(vii) discipline and dismissal;
(viii) grievance procedures;
(ix) union membership; and
(x) details concerning redundancy rights and procedures.
(ii) Employees employed before 1992 who were not office staff
"If you were employed at 17 July 1992, you will be entitled to the redundancy terms set out in the attached Appendix for the transition period to 31 December 1993.
Thereafter, your redundancy terms will be as set out in the Manual Agreements."
(i) the Written Statement incorporates "Agreements currently in force with the appropriate unions", and indicates that any changes in redundancy rights "will be incorporated in the appropriate documents and the company undertakes to keep them up to date". In context it seems to me that "currently" does not mean "at the present time", but "as may be current from time to time". That is at least consistent with the Company's obligations to keep the documents up to date. As a result the formation or variation of an agreement with the unions relating to redundancy would be incorporated into and vary the employment contract;
(ii) even if I am wrong in (i) above, it seems likely that employees engaged prior to 1992 and who were still in employment in the relevant years would have become aware that terms negotiated by the company with the unions would always be reflected in their contracts as they were in the contracts of other post 1992 employees who were covered by the collective agreements. The covenant by the company in the Written Terms to keep the documents relating to the contract up to date indicates that the company intended to make the terms known or available to be known and in the context of the mandatory terms supports the inference that it intended to become contractually bound by them. There was no other evidence that such practice was notorious but the evidence of Mrs Brent that the company's policy was to be fair and equitable at least raises a prima facie conclusion that this would have been the case. And there was no evidence from the Appellant to refute that conclusion; and
(iii) their Written Statements (or in the case of Mr Badcock his original Written Statement of 21 November 1983) contained at clause 2 (10) the words which appeared in the post 1992 Statements indicating that the National/Local Agreements to which the employment was subject included those concerned with "Details concerning redundancy rights and procedures". In the absence of evidence to the contrary, it seems likely to me therefore that there were agreements which dealt with those matters, and that they dealt with them in a similar way.
(iii) Office Staff: Employees who did not receive the standard Written Statement
(i) the terms were not incorporated into her initial contract, and were unlikely to have been known of by Ms Ferrari at the time that contract was made;
(ii) incorporation of those terms would therefore have had to have been a variation of that contract;
(iii) Ms Ferrari worked at Edinburgh for 3 years and 25 days before she left for the maternity leave which preceded her redundancy. The variation would have had to have taken place in that period as a result of the policy being drawn to her attention or consistently followed in that period. In the period of her employment the major redundancies were at Lydbrook in March 2000 and in August 2000 and at Edinburgh (where she worked). When these occurred she was on maternity leave. The policy could not have been incorporated by a custom of which she was unaware and it seems more likely than not that she was not aware of it;
(iv) she would have been aware of the discretion exercised by local management. Only if there had been redundancies of office staff in Edinburgh which had proceeded on the basis of the Memorandum of Agreement would she have been aware that the practice was consistently followed.
"5.7 Redundancy Terms
…When notice is paid in lieu, then the individuals last day of service will be extended to include the notice period [for the purpose of calculating the number of complete year's service qualify for redundancy payments].
Notice will be based on 1 week for every year of continuous service up to a maximum of 12 weeks or the individual's contractual notice period whichever is greater.
5.8 Severance Payments for Existing Employees [i.e. those in SCA's employment on 31.12.91]
…Payment will also be made of any unexpired period of notice as at the date of termination.
Severance pay will be subject to a maximum of two years (104 weeks) pay or the number of weeks to normal retirement date whichever is the less."
5.10 Severance payments for New Employees [i.e. those joining after 31.12.91]
…Severance pay i.e. redundancy pay plus notice paid in lieu will be subject to a minimum payment of 4 weeks' pay i.e. no one will receive any less than 4 weeks' pay on termination.
FORMULA FOR CALCULATION OF REDUNDANCY
WHERE NOTICE IS WORKED
- An existing employee with one years service
3 weeks plus £500 ex gratia
- An existing employee with 10 years service
30 weeks plus £1500 ex gratia
- An existing employee with 25 years service
Payment equals 75 weeks plus £3000
Check that amount does not exceed 104 weeks maximum pay.
If weekly wage is £250 then times 104 = £26,000
75 weeks x £250 = £18,750 + £3,000 ex gratia = £21,750
If notice is not worked a further 12 weeks at £250 will be paid. Therefore total payment = £24,750
This total is within the limit of £26,000.
- An existing employee with 30 years service
90 weeks plus £3,000 ex gratia
Check that the amount does not exceed 104 weeks maximum pay.
If weekly wage is £250 then times 104 = £26,000
90 weeks x £250 = £22,500 + £3,000 ex gratia = £25,000
If notice not worked a further 12 weeks at £250 could be paid. Therefore total payments could be £28,500. However this exceeds the ceiling of £26,000 so maximum ex gratia of £500 would apply in this case to bring total payments to £26,000.
- An existing employee with 35 years' service
Maximum entitlement would be 104 weeks irrespective or whether or not notice is worked.
" All employees will receive pay in lieu of notice based on their contractual notice period or the minimum legal entitlement whichever is the greater."
(1) Mr Carr's primary contention was that they gave the right to the employer to terminate the contract on short notice in the circumstances of redundancy, and if the contract was so terminated the employer became obliged to make a payment in lieu of notice.
(2) If that was not right then Mr Carr's alternative contention was that the clauses gave the employee a right to receive a payment in lieu of notice (in addition to any redundancy payment) if an employer dismissed the employee on short notice in a redundancy.
(3) Mr Prosser and Mr Sheldon say that the clauses confer no right on the employer to terminate on short notice but simply confer an obligation on the employer to offer to make a payment in lieu of notice as part of a redundancy package when the employee is asked to leave on short notice - an offer which the employee may accept or decline.
(1) Mr Carr's primary contention
(2) Mr Carr's Alternative
(3) The Appellant's offer analysis
Discussion
(i) in the Written Statement the provision relating to notice are laid out in a separate clause (clause 3) from the provisions incorporating the Memorandum of Agreement;
(ii) that clause is not expressed to be subject to the other provisions of the Written Statement, and its position following the other clauses suggests to me that in the case of inconsistency between it and the other clauses, its terms should prevail;
(iii) clause 2 of the Written Statement incorporates provision in the Memorandum of Agreement concerning redundancy "rights and procedures"; that language is not peculiarly well suited to the incorporation of short notice provisions;
(iv) although the redundancy provisions of the Memorandum of Agreement provide for a specific situation, and the specific provisions could therefore be taken to prevail of the more general language of clause 3, there is no clear, specific provision in the Memorandum giving the employer the right to terminate on short notice;
(v) I accept that a period of notice during which an employee remains employed may be important to an employee, and that clear words would be expected to abrogate the period of notice. It also seems to me that clear words such as those in Rex Stewart Jeffries Partner Ginsberg Ltd v Parker 1988 IRLR 483: "your service may be determined by the giving in writing of six calendar months' notice on either side or the payment of six months' salary in lieu thereof", are needed to abrogate the employee's rights to the notice required under the Employment Protection (Consolidation) Act 1978 or its predecessors or successors. The provisions in the Memorandum of Agreement are not clear in this respect. In particular the paragraph preceding the heading Severance payments for Existing Employees expressly provides for notice periods in the case of redundancy; three sentences later appear the words: "[p]ayment will also be made of any unexpired period of notice at the date of termination." Those words are not words clearly abrogating the right to notice just set out;
(vi) whilst it is possible that those drafting the Memorandum assumed that short notice with payment in lieu could be given under the provisions of the employment contract apart from the Memorandum, such an assumption cannot affect the interpretation of the Written Statement or require the Memorandum to be interpreted as permitting short notice to be given; and
(vii) lastly the Histon Redundancy Arrangements Note (referred to at paragraph 105 below) says:
" Payment will also be made of any unexpired period of notice…"
Although there is little difference, this seems to me to be more likely to confer on an employer the right to terminate on short notice than the words in the Memorandum of Agreement.
"The detailed arrangements for handling any redundancy situation will be a matter for local Branch determination subject to the conditions set out in this Memorandum of Agreement. The Dispute procedures will apply as necessary where local agreement cannot be reached."
"additional one week's pay [per year of service] will only be paid in the event of co-operation from employees in achieving an orderly run down of the business …"
(i) it was required to give the normal notice period (or for Existing Employees 12 weeks' notice if greater);
(ii) but it could ask (although it was not obliged to do so) the employee as part of the orderly run down of the business to accept short notice;
(iii) if the employee was an Existing Employee then accepting short notice triggered the right to a payment in lieu under (and capped by) the contract; if the employee was a New Employee any right to a payment in lieu would arise under the terms of any offer made by the employee when asking the employee to go on short notice (but see paragraph 98 below). In each case however the agreement of the employee to go on short notice varied the terms of the contract of employment. If the employee did not accept then the employer had no contractual right to dismiss on short notice, but if the employer had given notice it remained contractually obliged to make the redundancy payment under the contract;
(iv) if an employee accepted shorter notice his contract remained on foot but was amended by the agreement to take short notice. He then became entitled under that amended contract to a sum which incorporated the redundancy payments and the payment in lieu of notice - subject in the case of Existing Employees to the 104 weeks' cap, and in the case of New Employees to the 4 weeks' minimum;
(v) if (as I suspect would be unlikely in a planned negotiated redundancy) the employee was asked to go on no notice and agreed, the amendment to the contract would be more drastic but the redundancy payment and the payment in lieu would still be payable under the amended contract; and
(vi) the contractual obligations of the parties came to an end when the employee had worked to the end of the agreed short notice period, and the employer had made the payment under the contract.
(a) provide a contractual right to the set amount if the employer terminates without notice. Effectively, in those circumstances, they provide that an employer will not be able to breach the contract by summary termination or termination without adequate notice but will instead become liable to pay under the contract the specified amount. In effect then the words confer on the employer the right to terminate on short notice. Conferring such a right by the back door seems to me at odds with the nature of the agreement. In this case I do not believe the words can have that effect; or
(b) provide the terms which, if the employer wishes to terminate without breach on short notice, it must offer as to payment in lieu.
The latter seems to me therefore to be the only possibility in this case.
3. How were the redundancy payments actually made?
(i) the Appellant delegated management of its branch operations to local management which was given a substantial degree of autonomy;
(ii) redundancy arrangements would be negotiated by local branch management with the relevant unions. Central support would be provided as required depending upon the size of the redundancy exercise and local expertise;
(iii) central management's role was related to strategic decisions and not to the nuts and bolts of the redundancy arrangements;
(iv) the provisions of the Memorandum of Agreement would have been in the minds of the negotiators as the basis for the negotiation of the arrangements;
(v) the strategic objective of the Appellant was to be fair and equitable at local level. It was unlikely that any employee would receive less than the specified amounts in the Memorandum of Agreement even if the employee was not among those whose employment was covered by it. It was also unlikely that any employee received more than the amounts set out in those agreements.
(vi) The arrangements negotiated by local management with the unions would include matters related to notice periods and whether notice would be worked or whether part would be paid in lieu, but the implementation of the redundancy plan would be subject to, and would in the outcome vary with, matters such as the amount of available work and customer orders. Plans would have to be revisited and employees could be asked to leave earlier than originally intended, or to work out their notice periods, or remain in employment beyond the originally set termination date.
(vii) In the period 1995 to 2001 the company made at least 100 employees redundant in the UK.
"Employees are entitled to receive formal notice of redundancy based on 1 week's notice for every year of continuous service up to a maximum of 12 weeks or the individual's contractual notice period which ever is the longer.
"In the majority of cases, individuals will be given formal notice of redundancy and will be expected to work their notice period.
"In some circumstances it will not be possible to identify the exact date that someone will be able to leave the company sufficiently far in advance. In such circumstances individuals will receive the balance of any notice period not able to be worked, as a lump sum payment."
(i) At Histon five employees were made redundant. Copies of the letters enclosing the redundancy cheques were available in the bundle in two cases only. They each made reference to the "balance" of x weeks' compensation for loss of office and enclosed a schedule headed "Redundancy Terms as outlined in the Memorandum of Agreement…". In that schedule payment for notice not worked was described as "Compensation for Loss of Office". A copy of the letter had been signed and returned to "acknowledge safe receipt". There was no indication as to when or whether any agreement to work short notice had been reached other than, possibly, the reference to the "balance" of a period of weeks, which suggested short but not immediate notice, and therefore some earlier communication.
(ii) At Lydbrook 27 employees were made redundant in 1999 - 2000 and eight in 2000 - 2001. A copy of only one letter was available. (In the absence of any indication to the contrary I have taken other letters to have been in the same form). The letter is written "[f]urther to our recent discussions". There was therefore previous communication. It gives notice of termination of employment with effect on 31 March 2000. The letter indicates that the employee "will be entitled to redundancy payments as per the Memorandum of Agreement". It indicates that the employee "will be entitled to payment for the unexpired period of [his] notice entitlement". The employee has signed a copy of the letter under the rubric "I hereby accept the terms and conditions stated above and will leave the company on 31 March 2000." The date of the letter is unclear but it was signed by the employee on 29 February 2000 before the date of termination.
(iii) At Edinburgh six employees were made redundant in 2000 - 2001. Copies of the redundancy documentation for all six were available in the bundle. Copies of letters of Notification of Redundancy were signed by the relevant employee under a rubric accepting the contents of the letter and the sums stated in full and final settlement of any present or future claims the employee might have against SCA Packaging Limited (Scotland). In three cases an earlier letter entitled "Terms of Redundancy" asked the employee to sign a copy of the letter "to formalise your acceptance of this offer." Where it possible to determine the dates of the letters it appears that they, and the acceptances, were dated prior to the termination of the employment. The calculation of the redundancy payments made no reference in any case to the Memorandum of Agreement, but the calculations were in accordance with its terms. For Avril Ferrari, 1 month's "payment in lieu of notice" was included in the calculation; for those of the other employees who received payments relating to notice, the description of that part of the payment was "Notice Payment".
(i) Mr Browne at Histon was entitled to twelve weeks' notice, but he requested to work beyond the end of his full notice period. He did not leave SCA until 22 January 1967 since that date was his 60th birthday, which meant that he was then able to qualify for the Early Retirement Allowance (payable as a supplement to the SCA Pension to individuals between the ages of 60 and 65 who were over 60 years old at the date of their retirement). Accordingly, he was not paid any compensation for loss of office.
Mr Browne's treatment is consistent with my approach to the construction of the clauses of the Memorandum of Agreement.
(ii) Mr Baikie at Edinburgh was 37 weeks from retirement: for every week he worked he lost 3 weeks' redundancy pay. He was entitled to 12 weeks' notice but time actually worked and holidays accounted for 6 weeks. He left entitled to 6 weeks' pay in lieu, but because his redundancy entitlement was capped at 37 weeks' and his service with the company otherwise entitled him to 54 weeks' notice, the pay in lieu of notice did not go to swell the aggregate payment he received.
This treatment is not inconsistent with the construction I have adopted of the relevant clauses of the Memorandum of Agreement.
(iii) Mr Miller at Edinburgh was given notice on 18 July 2000 for his employment to terminate on 30 September 2000 which was 10 weeks' later. His service qualified for 117 weeks' of redundancy pay which was capped at 104 weeks. His total payment include no amount in respect of pay in lieu of notice whereas had his employment terminated 2 weeks later he would have received two weeks' money for working.
It seems to me that in taking 10 weeks' paid work and retiring at a month end Mr Miller may have agreed a package with the company which suited him. His treatment does not appear to compel the conclusion that he was forced to go 2 weeks early or that it was otherwise than in accordance with my construction of the clauses of the Memorandum of Agreement.
4. Was that part of any payment which was described or calculated as a payment in lieu of notice (or the equivalent), a payment derived from the relevant employee's employment?
| Type 1: | the employer gives proper notice to terminate the contract and puts the employee on garden leave. There is no breach. Any sum paid is wages; |
| Type 2: | the contract of employment provides expressly that the employment may be terminated either by notice or on payment of a sum in lieu of notice. If the employer summarily dismisses the employee and makes the payment, the employer is not in breach but the payment is not for work to be done under the contract. |
| Type 3: | at the end of the employment, the employer and the employee agree that the employment is to terminate forthwith on payment of a sum in lieu of notice. The employer is not in breach by dismissing summarily and the payment is not remuneration for work done. |
| Type 4: | without the agreement of the employee the employer summarily dismisses the employee and tenders a payment in lieu of proper notice. The employee is in breach of contract and the payment is on account of the employee's claim for damages for breach of contract. |
"It is inevitable that if a payment is made in substitution for a payment which might, subject to a contingency, have been payable that the nature of the payment which is made in lieu will be affected by the nature of the payment which might otherwise have been made."
(i) it is to compensate or relieve from distress an employee for what can be the unfortunate consequences of being unemployed;
(ii) it is payable after the employment has come to an end, and is not in the nature of deferred remuneration; and
(iii) it is payable only in limited circumstances and there will be no entitlement if the employee leaves of his own accord.
"It seems to me that a sum of money paid to obtain a release from a contingent liability under a contract of employment cannot be said to be received "under" the contract, is not for services rendered or to be rendered under the contract of employment".
"The point can, I think, be illuminated by considering the related question "why is the employee entitled to six months' notice of the employer's intention to terminate his employment?" The answer must be "… because that was the security, or continuity, of employment what the employee required as an inducement to enter into the contract of employment". The answer to the question "why is the employee entitled to a payment agreed to his salary for the remainder of the six month period if his employment is terminated by less than six months' notice?" must be the same: "…that was the security, or continuity, of salary which he required as an inducement to enter the employment".
"As I say the circumstances are not precisely within the ambit of the previous decision in EMI and of course they are further away still from Dale v de Soissons. But it is fair to note that if on [the date notice to terminate was originally given] the employer had tendered £90,000… by way of payment in lieu of notice, it is clear that that payment would have an emolument from the employment… Equally, if, rather than pay in lieu of notice, the notice [had taken] effect in 18 month's time… the monthly salary… would have been subject to tax.
"The question, then, is how can it be said that by giving notice…, retaining the taxpayer in employment for four weeks, paying him for that period… and then agreeing with him a package for the immediate termination of the employment after four weeks, which in economic terms… is close to what he would have been… paid if [immediate notice had been given and payment in lieu made],… how can that variation between [the two] procedures, both of which would be subject to tax, how can this intermediate course manage to escape being subject to tax?
"In my judgement, the answer is that it does not. The only way in which it could is… the payment of damages or other compensation for a breach of contract by the employer…"