Section 192A Taxes Consolidation Act (TCA) 1997 provides an exemption from income tax for awards that infringe an employee’s rights or entitlements under employment legislation.
Generally speaking, If the award or settlement relates to compensation for breach of statutory rights or entitlements, it should be exempt from taxation under the legislation.
If however the award or settlement relates to a loss of wages or salary (such as a claim under the Unfair Dismissals Act 1977 – 2015 or Payment of Wages Act 1991) the award is normally taxable.
The Revenue Manual cites an example of a civil servant who was discriminated against on the grounds of age by refusal to place him on a higher pay scale. The individual was also found to have been harassed at work. The sum awarded to the individual for age discrimination and harassment at work was exempt under Section 192(A) TCA 1997 but the pay due to him by virtue of the fact that he should have been on the higher pay scale was taxable.
When looking at cases it is extremely important to differentiate between awards which are remuneration or arrears of remuneration and awards which are quantified by reference to remuneration. For example, the Employment Equality Act 1998 states that an award under the legislation cannot exceed a sum of equivalent to 104 weeks pay. Such an award is not “pay” it is a sum equivalent to pay. Remuneration is being used as “a yardstick” to quantify the award.
Section 192(A) TCA 1997 exempts from income tax compensatory awards made as a result of an employee’s rights and entitlements in law having been infringed or breached through, for example, discrimination, harassment or victimisation. The exemption applies to:
Payments arising out of claims made under “a relevant Act” following a formal hearing before a “relevant authority”, on foot of a recommendation, decision or determination by that relevant authority, and
Subject to certain conditions, payments made under an out of court settlement, in place of a formal hearing before a relevant authority which has been agreed between an employee and his / her employer.
A “relevant Act” means an enactment that contains provisions for –
- the protection of employees’ rights and entitlements, or
- the obligations of employers towards employees.
Examples included in the Revenue Manual (Part 07-01-27):
- Employment Equality Acts 1998- 2015
- Maternity Protection Acts 1994 and 2004
- Equal Status Acts 2000-2015
- Parental Leave Act 1998
- Unfair Dismissals Acts 1977 – 2015
- Carer’s Leave Act 2001
- Terms of Employment Information Acts 1994 to 2014
- Payment of Wages Act 1991
- Protection of Young Persons (Employment) Act 1996
- Minimum Notice & Terms of Employment Acts 1973 to 2005
- Protection of Employees (Fixed- Term Work) Act 2003
- Protection of Employees (Part- Time Work) Act 2001
- Redundancy Payments Acts 1967 – 2014
- Organisation of Working Time Act 1997
- Protected Disclosures Act 2014
A “relevant authority” means any of the following:
- a Rights Commissioner;
- the Director of the Equality Tribunal;
- an adjudication officer of the Workplace Relations Commission;
- the Workplace Relations Commission;
- the District Court;
- an Employment Appeals Tribunal;
- the Labour Court;
- the Circuit Court;
- the High Court.
Mediation & ‘Out of Court’ Settlements
A payment made following mediation which is provided for in the relevant Act may be treated as a payment made on foot of a recommendation, decision or determination so that the relief under Section 192A TCA 97 can be available. For example, the Employment Equality Act 1998 contains provisions that allow disputes to be resolved through mediation.
Where an out of court settlement is arrived at without actual referral to a relevant authority, a payment made by agreement may also qualify for the exemption, if all of the following conditions are met –
- the agreement in settlement of a claim is evidenced in writing;
- the original statement of claim by the employee is evidenced in writing;
- the agreement is not between connected persons as defined in Section 10 TCA 1997;
- the claim would have been a bona fide claim under a relevant Act had it been made to a relevant authority;
- the claim is likely to have been the subject of a recommendation, decision or determination by a relevant authority that a payment be made;
- the payment does not exceed the maximum amount which could have been awarded under relevant legislation by the Rights Commissioner, Director of the Equality Tribunal, Employment Appeals Tribunal, Workplace Relations Commission or Labour Court as appropriate.
Employers are obliged to retain copies of any such agreements together with the employees’ statements of claims for a period of six years from the date the payment was made, and to make these documents available to any officer of the Revenue Commissioners when requested to do so.
There is no obligation on employers to look for advance approval of exemption under section 192A TCA 1997 in respect of ‘out of court’ settlements. However, where an employer does seek such an approval, a copy of the agreement and statement of the employee’s claim is likely to be sought and examined by Revenue before granting the exemption.
Payments not covered by Section 192A TCA 1997
As previously mentioned a distinction can be made between salary or wages (which are taxable) and compensation for a wrong done which is quantified by reference to salary or wages.
The exemption specifically does not apply to the following:
- Actual remuneration or arrears of remuneration (chargeable to tax under Section 112 TCA 1997) arising from a claim under a relevant act e.g. the non – payment of holiday pay under the Organisation of Working Time Act 1997 or arrears of remuneration under an equal pay claim under the Employment Equality Acts 1998 to 2015.
- The termination of an office or employment (chargeable to tax under Section 123 TCA 1997) e.g. a payment made under the Unfair Dismissals Act 1977 to 2015.
- Compensation for a reduction or possible reduction in future remuneration arising from a reorganisation of the business or changes in work procedures / methods.
- Compensation under a court order under Section 2B of the Employment Permits Act 2006.
Under normal circumstances where an employer pays legal fees incurred for services provided on behalf of an employee a taxable benefit in kind would arise with PAYE / PRSI / USC implications. However in certain circumstances an employer may pay the legal fees of the employee without a benefit in kind arising.
The following conditions must be met:
- The legal fees arise as a result of representing the employee in respect of an investigation / disciplinary procedure instigated by the employer or an action taken by the director or employee to recover compensation for loss of office or employment or, for example, breaches of employment law by the employer.
- Fees are payable to a member of the legal profession e.g. a solicitor.
- The legal fees are paid directly to the legal professional after the invoice for legal fees addressed to the employee has been provided to the employer (i.e. to evidence the legal fees).
- Where there is a settlement, a clause must be included in the agreement stating that the employer has agreed to pay the legal fees incurred in respect of the investigation / disciplinary procedure instigated by the employer or the action taken by the employee.