UK: employers should update template termination agreements in light of April tax changes and developments on NDAs

The tax treatment of payments for termination of employment has changed for terminations taking place on or after 6 April (see our earlier blog post here). The effect of the changes is to fully tax as earnings such part of a termination payment as is deemed to be in respect of unworked notice (the post-employment notice pay or "PENP"); the balance can then benefit from the £30,000 tax exemption. PENP is calculated using ‘basic pay’, which includes pay that would have been received had it not been salary sacrificed, but excludes overtime pay, bonuses, commission, allowances, benefits in kind etc. HMRC has now updated its Employment Income Manual to confirm that the calculation must be done even where the employment is terminated without notice by making a contractual payment in lieu; in the rare cases where the statutory PENP exceeds the contractual payment, the excess will be fully taxed. Although not expressly covered by the Manual, the HMRC may well take the view that the PENP calculation should also be applied in cases where compensation is paid following termination without notice for alleged gross misconduct or constructive dismissal.

Employers with template settlement agreements should review and if necessary update any wording addressing the tax treatment of compensation payments and appropriate tax indemnities.  As there is no longer a tax advantage in omitting a payment in lieu of notice clause, employers should consider including them in all template contracts, particularly if there are restrictive covenants (as otherwise these will fall away should the employer wish to terminate without notice).

It would also be prudent to review the scope of any confidentiality provisions at the same time. The current inquiry into the use of non-disclosure agreements by the Parliamentary Women and Equalities Committee in the context of sexual harassment cases (at which Herbert Smith Freehills employment law partner Andrew Taggart gave oral evidence, accessible here) has highlighted potential liabilities and reputational issues where such agreements could be seen as deterring the reporting of misconduct to law enforcement agencies or regulators. The Solicitors Regulatory Authority has issued a warning to solicitors not to use NDAs inappropriately in respect of their own businesses but also in respect of the advice given to clients. Further developments in this area may be on the agenda once the Committee has published its conclusions. The EHRC has published a report "Turning the tables: ending sexual harassment at work" (here), which calls for a number of changes to the law to improve protection from harassment.

Most employers' templates will already carve out whistleblowing disclosures from the scope of confidentiality undertakings, but it is advisable to extend this to explicitly permit disclosures to regulators and law enforcement agencies to ensure that employees are not left with the impression that these types of reporting are prohibited. The same applies to provisions clawing back compensation for breach of disclosure obligations. Employees should also not be prevented from disclosing confidential matters (in confidence) to their medical advisers in the course of seeking treatment, and should always be given a copy of the agreement. Similar issues may need to be considered in relation to other types of agreements containing confidentiality obligations. Please do contact your usual HSF contact if you would like assistance updating your templates.