Detailed Definition
A golden handshake, or golden good-bye, is a form of ex gratia payment (a payment made without the obligation of meeting any legal requirements) provided by an employer to an employee when their contract of employment is terminated. This type of severance payment is typically offered under conditions such as company takeovers, mergers, or substantial corporate restructuring, and is often a significant sum.
Tax Implications
Under specific circumstances, golden handshake payments can be made wholly or partly tax-free. To qualify for favorable tax treatment:
- The payment must not arise from a contractual obligation.
- The employee must not be entitled to the payment through any pre-agreed term.
If these conditions are met, the first £30,000 of such compensation is tax-free, with only the remaining balance subject to income tax.
Example Scenarios
- Company Takeover: An employee is offered a golden handshake as compensation for the termination of their employment contract due to the acquisition of their employer by another company.
- Executive Retirement: A senior executive receives a golden handshake as an incentive for early retirement amidst corporate downsizing.
- Layoffs in Restructuring: An employee is given a substantial non-contractual lump-sum payment as part of a large-scale redundancy program.
Frequently Asked Questions (FAQ)
Q1: Can any severance package be considered a golden handshake?
A1: No, a severance package is a broad term covering various types of compensation given upon employment termination. Not all severance packages qualify as golden handshakes, which are specific types of significant, tax-advantaged payments.
Q2: Are golden handshakes contractual?
A2: No, they must not stem from a contractual obligation for tax benefits to apply. They are discretionary (ex gratia) payments made by the employer.
Q3: How is the tax-free portion of a golden handshake determined?
A3: The first £30,000 of the payment can be tax-free if it meets non-contractual, discretionary criteria. Any amount above this figure is subject to taxation.
Q4: Who commonly receives golden handshakes?
A4: Recipients are often senior executives or key personnel who are being incentivized to leave during mergers, acquisitions, or corporate restructuring.
Q5: Can an employee negotiate for a golden handshake?**
A5: Yes, negotiations might occur, particularly for higher-level employees, but the payment remains non-contractual for tax benefits.
Related Terms
Severance Pay: Monetary compensation given to an employee upon termination of employment, often based on their tenure and does not necessarily include the tax-free benefits associated with a golden handshake.
Redundancy Pay: Statutorily required payments made to employees being made redundant. These are often structurally different from golden handshakes.
Ex Gratia Payment: Voluntary payments made by employers that are not required by contract or law.
Termination Package: Comprehensive benefits provided to an employee upon leaving the company, which may include severance pay, benefits continuation, stock options, etc.
Online References
Suggested Books for Further Studies
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“Severance and Separation Agreements” by J. Randall Coffey A practical guide on drafting and negotiating separation agreements.
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“Employment Law: A Practical Introduction” by Elizabeth Aylott A foundational text covering employment laws, including termination practices.
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“HR Transformation Technology” by Edward E. Lawler III Insights into modern HR practices including employee compensation strategies.
Accounting Basics: “Golden Handshake” Fundamentals Quiz
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