Severance Agreement & Tax Advice

Many times an employee discusses with an employer a parting of ways and within this context the employer proposes that a ‘Severance Agreement’ is the modus operandi for the way forward to conclude matters between the parties.

At this stage the employee is likely not to have obtained legal advice, and the employer drafts the severance agreement.

The employer includes a clause in the severance agreement, which is understandable, that on agreement between the parties, the employee waives all claims, actions, liabilities etc. known and unknown at the time the agreement is executed, which arise out of the employee’s employment. This includes any tax liability.

The employer gives no warranty as to the amount of Tax payable by reason of the termination payment, and no admission of any liability for breach of employment law is made by the employer in this agreement.

This employee then seeks independent legal advice to review this agreement as the employer agrees to discharge a legal cost advice fee, but not a tax advice fee.

Solicitors are not accountants or tax advisors, and it is very important that the employee gets advice from persons with the correct skillset.  

There are tax exemptions for certain payments under an employment context, namely arising from S.192A of the Taxes Consolidation Act 1997, wherein an employee can be exempt from income tax, however an employee may be liable for tax when a termination payment is paid, and the severance agreement will likely disconnect the employer from any liability in this regard.

As per S.123 of the Taxes Consolidation Act 1997, there is tax treatment of payments concerning terminations of holding office, and employees can have a tax liability once a severance agreement is executed between the parties.

Many employees see the clause in a severance agreement whereby the employer may agree to discharge the legal cost fee of independent legal advice, but there is no agreement to discharge the cost of a Tax Advisor for the employee, before he/she signs the agreement.

It is of the utmost importance to obtain Tax advice and an accountant / tax advisor should be engaged by an employee to review if they have any tax liability before they sign and the severance agreement is executed, in our opinion.

Disclaimer

Please be advised that the above-mentioned material is intended as an overview and as a broad out-line of the topic discussed. It should not be considered as complete and comprehensive legal advice, nor act as an appropriate substitute. Legal advice should be obtained from a solicitor prior to relying on anything in this article.

Due care has been taken in the publication of this article and we do not accept legal liability as a result of reliance on any material covered in the above article.

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