The applicability of an exemption regime requires the taxpayer to provide rigorous proof of fulfilment of all factual prerequisites giving rise to compensatory damages.

The Court of Cassation, Tax Division, by Order No 8615 of 27 March 2023 returned to examine the complex subject of the taxation regime applicable to the compensation due in connection with demotion suffered by the worker.

The case on which the Court was called upon to rule related to a dispute between the Italian Revenue Agency (Agenzia delle Entrate) and a worker who, in the context of a legal proceedings for demotion, reached an out-of-court settlement with her employer who paid her a sum by way of ‘compensation for moral, professional and biological damage’.

Since there was no distinction between the compensatory headings, the Italian Revenue Agency deducted Italian Personal Income Tax (Imposta sul reddito delle persone fisiche, ‘IRPEF’) from the amount received by the worker, who, therefore, brought proceedings seeking its reimbursement. The Provincial Tax Commission rejected the worker’s application. In contrast, the Regional Territorial Court reversed the decision, upholding the application against the Italian Revenue Agency, and declaring that the exemption regime applied to the sums under discussion.

On the subject of taxation of employment income or similar, the Italian Income Tax Consolidation Act No 917/1986 (Testo unico delle imposte sui redditi, ‘TUIR’) identifies the category of replacement income for employment income. Article Section 6, paragraph 2 of TUIR provides that thefollowing constitute income, of the same category as that replaced and/or lost, regardless of the reason for the payment: (i) income earned as replacement income, including as a result of the assignment of the related receivables; (ii) indemnities received, including in the form of insurance, as compensation for damages consisting in the loss of income, excluding those resulting from permanent disability or death.

The rationale behindthe legislation is that only the payments, emoluments or compensation that have resulted in the enrichment of the subject should be considered taxable.

For this purpose, a distinction is made between (i) loss of profit, i.e. the loss of income that is recognised as belonging to the same category as lost or replacement income (under Article 6, paragraph 2 of TUIR); (ii) consequential damages, i.e. the restoration of assets, namely compensation intended to cover the financial loss and not to replace lost income.

Continue reading the full version published in Norme e Tributi Plus Diritto of Il Sole 24 Ore.

The Court of Cassation, in its ruling of 20 May 2021, no. 13787 established that if a company transfer is declared illegitimate, liability for any resulting employee demotion falls on the transferee who used the service and not the transferor.

This case follows a judicial application for investigations into a demotion by an employee who had been transferred together with a business branch and who, since March 2004, had become an employee of the transferee company.

The court of first instance upheld the employee’s claim and ordered the transferor and the transferee jointly to pay damages. This decision was then confirmed in the appeal and challenged in the Court of Cassation by the transferor company.

According to the transferor company – having ascertained that (i) the demotion lasted from April 2002 until October 2010 and (ii) from March 2004, the employee was employed exclusively by the transferee company – the joint and liability for the entire period was flawed. It argued that the demotion liability fell on the company using the services, and who had the power to assign the duties.

In upholding the company’s appeal, the Court of Cassation ruled that if a business transfer is judicially invalid, the employment relationship continues with the transferor, and a new and different relationship is established with the former, and no longer, transferee, under whose the employee materially continued to work.

According to the Court of Cassation, “in addition to the dormant employment relationship with the original transferor company (…), there is a service materially provided for the party with whom the employee, unlawfully transferred with the business branch transfer, has established a de facto employment relationship. This service produces legal effects and obligations for the party who uses the work within its business organisation, including that which derives from art. 2103 of the Italian Civil Code, so that any violation of this rule cannot be attributed to the transferor who does not use the work.”

The Court of Cassation overturned the part of the Court of Appeal’s ruling, which ordered the two companies to jointly pay compensation for the damages arising from the demotion suffered while the employee worked for the transferee company.

The Italian Cassation Court with its sentence 6750 of 10 March 2020, observed that an employer who demoted and left inactive a worker reintegrated following a ruling of unlawful dismissal notified to the same, is required to pay any personal injury sustained.

The facts

The first instance Judge partially granted the claim submitted by a worker, granting the request for payment of damages sustained by the worker due to demotion and rejected those aimed at compensation for personal injury. The demotion regarded the worker not being reinstated in the position of agency director that he had previously held after the verdict of the trial concerning the lawfulness of his prior dismissal.

The assigned Appeals Court, partly granting the charges expressed by the worker, sentenced the bank employer to compensate the personal injury he sustained and rejected (partly granting the incidental appeal and reversing the judgment of the court of first instance) his request aimed at restitution of the harm to his professional reputation and the additional requests for compensation for damages.

According to the Court of Appeals the request relative to the damage to his professional reputation could not be granted since the worker had not exhibited the injuries suffered due to the ascertained demotion. Instead, the district Court, had granted the request for compensation for personal injury given the “correct deduction” by the worker of the bank’s breach that had forced him, once readmitted on the job, to a substantial inactivity, of the contracted pathologies and the connections between them and the demotion.

The Appeals Court paid the damage, completely placing it as the responsibility of the employer because quantifiable – in the concrete case – at 3% of the disability verified by the court-appointed expert (in a legal context where INAIL can only compensate a damage equal to or greater than 6% and therefore correctly excluding any question of differential damage).

Objecting to the ruling of second instance the worker appealed to the Cassation Court, challenged by the bank which also submitted cross-appeal.

The decision of the Court of Cassation

In rejecting the worker’s request for harm to professional reputation, the Court of Cassation confirmed that the same had not exhibited, for the period considered, the injuries resulting from the ascertained demotion. It follows that, according to the Court, which, without prejudice to the employer’s failure to assign the worker to the previous duties, “the compensation for additional damage is inadmissible, unless you want, inadmissibly, to consider the mere demotion as coinciding with the harm to professional reputation” (cfr. Court of Cassation S.U. 26972/2008, no. 5067/2010, no. 24143/2010).

Moreover, according to the Court of Cassation, the trial judges correctly took into account the deduction, by the worker, of the historical fact of the employer’s breach, that had left him practically inactive, indication of the contracted pathologies and the causation between them and the demotion, as well as the presentation of the medical documentation attesting the disease and his employment from the inferred demotion.

According to the Court of Cassation, the trial judges clarified, in general terms based on case studies on lawfulness (cfr. ex multis Court of Cassation no. 20807 of 14 October 2016; also see Court of Cassation no. 9166 of 10 April 2017; Court of Cassation no. 27669 of 2017 and no. 25618 of 2018), as “the mere welfare indemnity cannot be considered exhaustive of the right to complete protection of health, based on the constitution, thus having to admit the complete compensation of personal injury”

The worker had in fact provided all of the allegations necessary for compensation of a damage completely the responsibility of the employer because less than the coverage of welfare indemnity.

To conclude, the Court of Cassation rejected all of the grievances and confirmed what had been ruled on appeal.

 The Court of Cassation, with judgement No. 836 dated 16 January 2018 overturned the judgement issued by the Court of the Appeals having local jurisdiction, which agreeing to the conclusions reached by the judge of first instance, had confirmed the unlawfulness of the dismissal ordered to an employee, who, by refusing to perform demoting tasks, failed to go to work for more than four days. The Court of Appeals, ordering the reintegration of the employee at work pursuant to article 18, Law No. 300/70, deemed such behaviour as a legitimate form of self-protection pursuant to article 1460 of the Civil Code The Court of Cassation – while confirming the demotion and the partial application of the requirements for the application of the aforementioned civil law – accepted the employer’s appeal (losing party in the proceedings on the merits) on the principle that the assignment to demoted tasks does not authorise the worker to refuse to provide service at all. This is valid where the employer (as in the specific case) meets its primary obligations such as payment of salary, social security contributions and insurance, in addition to health and safety protection. In summary, only in the case of employer’s full default then refusal to provide service is allowed and deemed justified. Otherwise, what occurs is a conduct in violation of the principle of good faith as established in article 1460 of the Civil Code, in addition to the duties of due diligence and submittal to the hierarchical authority of the employer.