Although not desirable, it is not unusual for an employee to raise a personal grievance with their employer. Thankfully section 123 of the Employment Relations Act 2000 (ERA) provides for a number of remedies for all parties, where an employee has a personal grievance. Where an employee is awarded grievance money due to suffering ‘work-related’ humiliation, loss of dignity, or injury to feelings; regardless of a court ordered or out of court settlement – the question arises how such payment should be treated from a PAYE or personal tax perspective.
Depending on circumstances, such compensation is usually not considered to be derived “in connection with employment” and is therefore non-taxable, with no requirement to withhold PAYE. However, because the treatment is very fact specific it is common for non-taxable payments to be reviewed by Inland Revenue.
The IRD’s view is that there must be sufficient evidence to prove that firstly, there is the presence of a genuine Personal Grievance, secondly, that there is a sufficient nexus between the amount paid and the severity of the claim, and thirdly, that the payment made is entirely tied to the grievance and not another statutory payment obligation. Inland Revenue’s view is, there needs to be valid and documented proof of the Personal Grievance – a court ordered document would suffice, or a written admission in writing by the employer that they acted in a manner that was unfair or unjust. Given any fair-minded employer is unlikely to make such an admission in writing – it remains prudent to ensure your HR protocols reflect genuine commitment to fairness, respect and professionalism in order to hopefully avoid such problems from arising.