News Items – at 24th January 2007

Employment Law Simplification Review

DTI proposes cost-saving improvements to payroll systems

The Department of Trade and Industry (DTI) is currently looking at ways of reducing the administrative costs placed on business by employment legislation, through the Employment Law Simplification Review.  Efforts are concentrated on two key areas:

• the production of written statements of employment particulars, estimated to be costing business around £650 million each year, and
  
  
• the production of statements of redundancy terms, estimated to be costing business around £30 million each year.

Employers are required under employment law to issue

• a written statement of employment particulars to new employees within two months of starting, which must provide up to 14 key employment terms
  
  
• a written notice of any changes to those employment terms, within one month of the change
  
  
• a written statement to employees being made redundant that sets out how their redundancy pay has been calculated.

A DTI document that has been forwarded to payroll system developers by HMRC sets out the background to these efforts and describes possible approaches.  The following suggestions and proposals are set out:

• the use of the Business Link online tool that allows employers to prepare written statements of employment particulars in about a half hour, compared with the average £160 per statement that the DTI suggests is currently being paid to external advisers.
  
  
• to avoid unnecessary duplication by including all of the 14 statutory employment terms in  employment contracts and appointment letters, thereby avoiding altogether the need to issue written statements of employment particulars.
  
  
• to increase compliance with the statutory requirement to produce the written statements by enhancing payroll systems so that, whenever a new employee is set up, a direct link to the Business Link online tool is provided.
  
  
• to enhance the existing DTI facility for calculating statutory redundancy pay by allowing the results of the calculation to be transferred automatically to a standard letter.

Further information:
Create a written statement of employment  http://www.businesslink.gov.uk/bdotg/action/stmtEmpLanding?topicId=
1075225309&r.li=1078381403&r.l1=1073858787Calculate how much
redundancy pay is due  http://www.dti.gov.uk/employment/employment
legislation/employment-guidance/page33157.html

Payroll deadlines during the next month

February 2 – This is the date by which any changes to the provision of company cars in the three months to January 5 must be reported using form P46(Car).

February 5 – This is the final day of tax month 10.  Tax and NICs etc. for payments made in the tax month to February 5 are due for payment to the Accounts Office by February 19, or by February 22 if paid electronically.

February 19 – For employers required to pay tax and NICs etc to the Accounts Office monthly, this is the deadline for payment to be received by the Accounts Office, unless made electronically.

February 22 – For employers required to pay tax and NICs to the Accounts Office monthly, this is the deadline for electronic payments to be cleared into the HMRC bank account.  Payments through BACS must be initiated by February 20 at the latest.

Payroll Tip

(Please note that this article provides guidance on the NICs liabilities on protective awards that corrects the information given when it first appeared two weeks ago.)

Protective Awards

How are payments under a protective award calculated and taxed?

An employment tribunal may make a protective award covering one or more employees in circumstances where the employer proposes to make 20 or more employees redundant and fails to follow the consultation rules set out in section 188 of the Trade Union and Labour Relations (Consolidation) Act 1992.

The representative of the affected employees, i.e. an elected employee representative, trade union official or one of the employees, may make the claim.  The tribunal, if it finds the claim well-founded, must make a declaration to that effect and may make a protective award.  The award is made in respect of those employees about whom the employer has failed to consult, who have been dismissed as redundant or whom it is proposed to dismiss as redundant, and order the employer to pay remuneration for the “protected period”.

The “protected period” is the period that

• starts on the earlier of (1) the date on which the first of the dismissals is to take effect, and (2) the date of the award,
• is of a length that the tribunal decides properly reflects the seriousness of the employer’s failure to consult, and
• does not exceed 90 days. 

The award will specify the number of employees involved, their names, the number of days pay that each of them must receive and the start date of the protected period.
 
The payment is calculated using the “week’s pay” rules defined in the Employment Rights Act 1996.  There is no weekly ceiling as there is in the case of statutory redundancy pay.  The calculation date for cases where “a week’s pay” is based on twelve weeks of earnings is the earlier of

• the date on which the protective award was made, and
• the date used to calculate the employee’s redundancy pay, or that would be used if the employee were entitled to redundancy pay.

If the award period is not a whole number of weeks, the additional few days is a proportion of “a week’s pay”.  For example, a 60-day award would be 8 weeks and 4/7ths of a week.

A protective award is punitive and, if any of the employees who are to be dismissed as redundant are still in employment during the protected period, their earnings from the employment cannot be offset against their protective award payments.

Recoupment of state benefits

Employers required to make protective award payments must remember that, if any of the employees concerned have already received Jobseekers’ Allowance or income support during the period of the award, the amount of those benefits paid must be deducted from the protective award payments before they are paid.  The employment tribunal automatically passes details of the award to Jobcentre Plus and the employer must, within 10 days of the award being made, provide the name, address and NI number of each employee entitled to an award payment and the date on which the employment ended or will end.

Jobcentre Plus then sends recoupment notices to the employer for each of the employees affected, indicating whether or not any recoupment is required.  If it is, the amount indicated on the notice must be deducted from the award payment before it is paid.  If the employer fails to make the recovery, the employer becomes personally liable to pay the amount involved to Jobcentre Plus, whether or not it is possible to recover the overpayment from the employee.

Income tax liabilities

Because the protective award payment is made in respect of the termination, i.e. the redundancy, the total amount, before any recoupment, is subject to income tax to the extent that, when combined with any other such payments, they exceed £30,000.

If any of the payment is taxable and is made to the employee

• before or at the time of leaving, it is added to gross pay and taxed under PAYE as normal.  The amount added to gross pay for tax purposes is not subject to Class 1 NICs – entirely separate NICs rules apply (see below).
• after the P45 has been issued, income tax must be deducted using code BR.  A further P45 must never be issued; neither may the issued P45 be amended.  The tax office does not need to be informed about the additional payment at the time, but the payroll record must be amended so that the correct payment and tax appear on the year-end returns. The employee should be given a letter giving details of
  • the date of the payment,
  • the gross amount of the payment, and
  • the amount of tax deducted.

NICs liabilities

Termination payments that qualify under the £30,000 exemption for tax purposes normally have no liability whatsoever for NICs.  However, payments of remuneration under protective awards are one of the “employment protection entitlements” specified in section 112 of the Social Security Contributions and Benefits Act 1992 that are liable in full for Class 1 NICs.

 The others are

• payments of arrears of pay in connection with an order for reinstatement or re-engagement under the Employment Rights Act 1996, and
• payments in connection with an order for continuation of employment, under the Trade Union and Labour Relations (Consolidation) Act 1992.

The Regulations made in connection with these entitlements require the NICs liabilities to be calculated using an earnings period that is specific to the period of the award, or one week if that is longer.  For example, the NICs due on a protective award with a protected period of 45 days has an earnings period of 45 days.

This means that the payment under the protective award must be handled for NICs purposes entirely separately to the employee’s normal payments through the payroll.  The NICs are calculated using the gross amount of the award, before any recoupment, the employee’s normal table letter, and the lower earnings limit, earnings threshold and upper earnings limit that relate to the earnings period.  The results of the calculation must be recorded against the tax week or month in which the payment is made but separately from any NICs from the employee’s wage or salary for that week or month.

Exceptionally, this standalone calculation is not required for directors whose NICs are calculated using an annual or pro-rata annual earnings period.  The amount of the payment is simply included in the total earnings paid to date and the NICs payable to date are calculated accordingly.

Example: A factory is closing down with the loss of 120 jobs.  The employer fails to consult with the trade union representing the employees and the union makes a claim to an employment tribunal for a protective award.  The tribunal makes an award with a protected period of 75 days.  The site manager, whose salary is £39,000, is among the employees named in the protective award.  The payment due to the manager is £8035.72 (i.e. 10 weeks, plus 5/7th of a week, multiplied by £750, a week’s pay).  The protective award payment is made after the manager leaves, along with other tax-free termination payments of £25,000.  As the total payments exceed £30,000, there is tax to pay on the £3035.72 excess and the employer deducts the tax at basic rate.

Both employee and employer NICs are due on the full £8035.72, using a 75-day earnings period and

• a lower earnings limit of £900, i.e. £84 ÷ 7 × 75
• an earnings threshold of £1034.59, i.e. £5035 ÷ 365 × 75
• an upper earnings limit of £6910.71, i.e. £645 ÷ 7 × 75.

The manager’s normal table letter is D, so, using the exact percentage method of calculation,

• the primary NICs are £561.46, i.e. – £2.15 +  £552.36 + £11.25
• the secondary NICs are £685.77, i.e. – £4.71 + £546.48 + £144.00.

The employer sends details of the payment and the deductions to the employee and amends the employee’s payroll record for the tax year to reflect the tax and NICs calculations.

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