Payments for hurt and humiliation as part of a settlement are non-taxable payments. If remuneration is paid (lost wages, notice) then that is taxable.

The incentive for both parties is to maximise the non taxable proportion of a settlement giving a higher return for the employee at no extra cost to the employer.

It has also been common practice to try to protect such payments from IRD challenge by getting the settlement agreed signed by a mediator. A recent IRD ruling makes it clear that if payments for humiliation are in reality for lost remuneration then they will be open to IRD challenge despite having been signed by a mediator.

Advisers need to be aware of this possibility and to warn employers and employees of the consequences of a successful challenge.