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.
For further information about recoupment notices, see
www.businesslink.gov.uk/bdotg/action/detail?r.s=sl&r.lc=en&type=RESOURCES&itemId=1081739270
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 £46,800, is among the employees named in the protective award. The payment due to the manager is £9642.86 (i.e. 10 weeks, plus 5/7th of a week, multiplied by £900, 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 payment, £34,642.86 exceeds £30,000, there is tax to pay on the £4,642.86 excess and the employer deducts the tax at basic rate.
Both employee and employer NICs are due on the full £9642.86, using a 75-day earnings period and
- a lower earnings limit of £1017.86, i.e. £95 ÷ 7 × 75
- an earnings threshold of £1174.31, i.e. £5715 ÷ 365 × 75
- an upper accrual point of £8250, i.e. £770 ÷ 7 × 75
- an upper earnings limit of £9015.41, i.e. £43875 ÷ 365 × 75.
The manager’s normal table letter is D, so, using the exact percentage method of calculation,
- the primary NICs are £749.07, i.e. – £2.50 + £661.11 + £84.19 + £6.27
- the secondary NICs are £816.36, i.e. – £5.79 + £643.89 + £97.97 + £80.31.
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.
Where the protective award payment relates in whole or in part to a different tax year to the one in which the employer performs the calculation, the employee may ask HMRC in writing to allocate the NICs to that other tax year.
References:
HMRC National Insurance Manual, starting on page
www.hmrc.gov.uk/manuals/nimmanual/nim07020.htm
Social Security Contributions and Benefits Act 1992, section 112
Social Security (Contributions) Regulation 2001, sections 2, 5 and 8
The Social Security (Contributions) (Employment Protection) Regulations 1977 (available at
www.hmrc.gov.uk/nic_acts_2001/vol_01/nicsi/nicsi-2-15.htm )
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