Norman v Yellow Pages Sales Ltd.

A lump-sum employment compromise does not ordinarily contain an implied term requiring the employer to apportion the payment between taxable and non-taxable claims. Such an obligation must arise from the settlement terms. General tax guidance does not create a contractual duty. The employer must comply with its PAYE obligations, and any private apportionment is not binding on HMRC. The employee must resolve the tax treatment with HMRC. A later refund by HMRC does not retrospectively establish a breach by the employer or entitle the employee to interest from it.

The appellant, a former sales consultant, brought employment claims including sex and race discrimination, victimisation, wrongful dismissal and unlawful deductions from wages. The claims were compromised through an ACAS COT3 agreement providing for payment of £53,000 in full and final settlement, without allocating any part of the sum to particular claims.

The respondent paid £47,657.34 after deductions for income tax and National Insurance. The appellant claimed that the respondent was contractually obliged to apportion part of the settlement to injury to feelings, which was not generally taxable. District Judge Freeman dismissed the claim, and HHJ Hughes QC dismissed the appeal at Winchester County Court on 28 August 2007. Permission for a second appeal was granted on the apportionment issue. The central question was whether the COT3 implied such an obligation.

Appeal dismissed unanimously.

1. The first argument, that the settlement required payment of £53,000 net of tax and National Insurance, was not permitted to be appealed. The judgment therefore did not establish any general rule that a sum stated in an agreement of this kind is gross rather than net.
2. Where a compromise agreement provides for a single lump sum and contains no apportionment between taxable and non-taxable elements, the court will not imply an obligation requiring the employer to make a fair apportionment. An apportionment may be expressly agreed, but none was agreed here. The absence of any discussion of apportionment, particularly where the appellant was legally represented, supported that conclusion.
3. The nature of a compromise is that the parties settle without admissions and avoid determination by an employment tribunal. Requiring an employer to acknowledge that a substantial part of the payment represented injury to feelings could make settlement more difficult. The employer’s duties to HMRC also militate against implying a contractual obligation to adopt an apportionment favourable to the employee.
4. To the extent that termination payments are taxable, they are employment income and relevant payments under the Income Tax (Pay As You Earn) Regulations 2003, including regulations 4 and 21. They may also attract National Insurance contributions under the Social Security (Contributions) Regulations 2001. HMRC is not bound by an apportionment agreed between the parties and may examine the underlying facts and documents.
5. The National Insurance claim stood or fell with the alleged implied term. No breach of contract was established. The later HMRC refund did not create a retrospective obligation on the respondent. Any further claim for interest would lie, if at all, against HMRC rather than the former employer. Lord Justice Longmore agreed, and Lord Justice Jacob added that any unpaid interest on sums retained by HMRC should likewise be claimed from HMRC.

• Court of Appeal (Civil Division): On 9 November 2010, dismissed the second appeal.
• Winchester County Court: On 28 August 2007, HHJ Hughes QC dismissed the appeal from the decision of District Judge Freeman.
• Poole County Court: On 8 December 2006, District Judge Freeman dismissed the appellant’s money claim for breach of the settlement agreement.