When an employer pays an employee a lump sum of wages owed over a longer period, complications can arise that have wider legal and tax implications. A recent Supreme Court decision shows the consequences can be unexpected and significant.
One-off payment of wages owed and its consequences
What happened?
In a case decided by the Supreme Court, the employer failed to pay the employee's wages for 1.5 years. After litigation for payment of the outstanding wages, the employee received the outstanding wages in a lump sum (totaling 5 years). He also received statutory default interest, which had accrued on the amount owed in the meantime.
When can such a situation occur? Typically, when an employer terminates the employment relationship with an employee and no longer assigns work to the employee or pays wages. However, the employee can object to the termination and file a lawsuit. We wrote about invalid termination of employment here. If the subsequent proceedings show that the termination was invalid the employer is generally liable for paying the employee's outstanding wages. zde.
However, the one-off payment of wages owed to the employee had an unexpected tax impact. The employee was obliged to pay higher personal income tax because of the solidarity tax increase (now a higher tax rate).
Damage caused by higher tax liability
Why was the income tax higher?
If the employee were to receive a regular salary, his tax liability would be spread over several years, and the solidarity increase in personal income tax would not occur at all. However, as a result of the lump sum payment, the employee had to pay more tax for the tax period in which the wages due were paid. This was because his total income was higher.
Supreme Court ruling
The employee is entitled to compensation
The Supreme Court has ruled that an employer is obliged to compensate an employee for damages incurred by paying higher taxes. This claim is based on the fact that the damage would not have occurred if the employer had paid the wages continuously on the due dates.
Interest on late payment does not cover this damage
Statutory default interest is not a substitute for higher tax liability. It serves to cover the loss of the value of money in time (for the period of default). Default interest also compensates for the inability to use the money during the period of default; the debtor may be short of money in the interim, in which case he must obtain it on the money market at commercial interest. The Supreme Court therefore confirmed that the employer must pay the employee's damages in addition to the default interest.
Implications for employees and employers
For employers, this is another matter that they should take into account when litigating with an employee over an (invalid) dismissal, more precisely if the employee is successful in such litigation and the court declares that the employer's termination of employment was invalid. The employer then typically pays the wages even during the (often long) proceedings. If the employee therefore incurs a higher tax liability, this will be an additional cost for the employer.
From the employee's point of view, this ruling makes it clear that if, for some reason, the wages owed are paid in one lump sum and he, therefore, incurs a higher tax liability than if the wages were paid in stages, he can successfully claim compensation from the employer for the higher tax paid.
If you, as an employer or employee, find yourself in a similar situation, we recommend you consult an employment law specialist. We are at your disposal.
