Protected conversations and termination payments

30 April 2020

This article was first published on the EC3 Legal website prior to its merger with Birketts on 30 April 2020.

Exit discussions 

An exit discussion, if conducted properly, affords both the employer and the employee the opportunity to have an open and honest dialogue about an employment situation in order to seek some sort of resolution.

If such a discussion is successful, the employment will end on a mutually agreed date and on agreed terms which would normally be set out in a settlement agreement. A settlement agreement is a legally binding contract which can be used to end the employment relationship on agreed terms. The main purpose of such an agreement is to prevent employees from exercising their right to make a claim to an Employment Tribunal or court usually in return for a compensation package from the employer. If the discussion is not successful, the employer must make the employee aware of the alternative which could be performance management or a disciplinary procedure. 

Protected conversations

A protected conversation allows an employer and an employee to discuss an employee’s exit even when no dispute exists between the parties, in the knowledge that neither can rely on the discussions in any future proceedings. This is different to discussions and correspondence which are marked ‘without prejudice’ which are a means by which to resolve an existing dispute between the employer and employee.  

Protected conversations can only be withheld as evidence in ‘ordinary’ unfair dismissal cases and so the protection it affords is narrow in scope. In claims where the dismissal is automatically unfair or in claims for unlawful discrimination, the conversation would be disclosable. Certain protected conversations are not protected if they relate to:

  • Automatically unfair dismissal such as whistleblowing or union membership.
  • Harassment or victimisation.
  • Breach of contract or wrongful dismissal.
  • Physical assault, threats and other criminal behaviour.
  • Discrimination.
  • Putting undue pressure on an employee (e.g. an employer saying before any form of disciplinary process has begun that if a settlement agreement is rejected then the employee will be dismissed).

Also, a tribunal can take account of a conversation in which, in the tribunal’s view, something was said or done that was improper or was ‘connected with improper behaviour’.

Termination payments 

If the exit discussion is successful and a settlement agreement is proposed, it is important to distinguish between payments due to the employee under the contract of employment and any separate termination payment which is paid in connection with the termination of employment.  

Any payments provided for in the employment contract such as salary, bonuses and accrued holiday will all be fully taxable on termination. However, the first £30,000 of a non contractual payment which is paid in connection with the termination of employment is tax free. This distinction should be made clear in the settlement agreement.

Before 6 April 2018 if a PILON was not provided for in the employment contract, it could fall within the £30,000 tax free exemption. The position now is that all PILONs are subject to income tax and class 1 NICs. When drafting a settlement agreement, it is prudent to keep notice pay/contractual payments and termination payments entirely separate. 

If an employee will have worked their notice period as at their termination date (and therefore there is no PILON), this should be stated thus within the Settlement Agreement so that it is clear to HMRC that no part of the termination payment constitutes PENP (post employment notice pay). 

If the employer does not deduct tax when it becomes due, it will be liable for the tax, and various penalties and interest.

If you would like any additional information on restrictive covenants or any of the areas discussed in this article please contact David Coupe on 0203 553 4884.