Settlement Agreements

A settlement agreement can be used in a variety of situations in which there is a dispute between an employer and an employee.  Generally, they are used as a way to resolve a matter without going to Employment Tribunal by offering an employee a way to exit the business on amicable terms with a compensatory figure attached.

Typically, an employer will offer a settlement agreement to an employee, however it is not unheard of for employees to request them from an employer.

Settlement agreements can be used in the following situations:

• A dispute has arisen which could lead to a Tribunal claim, for example unfair dismissal, breach of contract or discrimination. In this case, an employer may choose to offer a settlement agreement as opposed to following a more formal procedure.
• As an alternative to redundancy or change of position due to restructuring.
• Due to the poor performance of an employee and neither party wishes to follow a capability process.

In signing a settlement agreement you will essentially be waiving your rights to bring an Employment Tribunal claim against your employer.

This can be an important consideration if the reason the settlement agreement has been offered is due to an ongoing grievance or dispute with your employer.  You will need to discuss with your chosen legal advisor whether the settlement agreement would be more beneficial either financially and non-financially, or whether it could be better to pursue a Tribunal claim.

Once you have been offered a settlement agreement, you are legally entitled to a reasonable amount of time to review the document and consider the offer being made.  Your employer should not put you under any undue pressure, and ACAS have advised that up to 10 calendar days should be allowed.  However, due to the nature of these agreements, time is usually of the essence and so we will act quickly to ensure no opportunities are missed while taking everything into consideration and helping you reach the right decision.

In the situation that you are requesting a settlement agreement from your employer, it is crucial that you take legal advice before doing so, or before handing in your notice.  This is not only due to procedural matters, but also due to the time limits that are involved in bringing a Tribunal claim.

If your employer has offered you a settlement agreement, you do not have to accept the initial offer.  Upon reviewing your contract of employment and the circumstances surrounding the offer, we can negotiate on your behalf, either in regard to the compensatory offer or the non-financial clauses of the agreement.

Negotiation of this nature can be sensitive and rejecting an offer does carry certain risks.  It is important that your advisor has the right experience to be able to manage this task with diplomacy, practicality and considering the commercial implications for your employer.

We will always provide our realistic and honest advice as to whether we believe it prudent to negotiate further, which could risk the agreement being withdrawn, or whether to accept the initial offer.

By signing a settlement agreement, as an employee you will be forfeiting certain rights. To ensure that you are not put at an unfair advantage when it is likely your employer will have received legal guidance in the drafting of the agreement, in order for a settlement agreement to be binding, the following requirements apply:

• The settlement agreement must be in writing.
• The agreement must relate to the specific claims that will no longer be able to be brought upon signing.
• You must receive independent legal advice. Employers will normally contribute, usually a minimum of approximately £250 + VAT, and the chosen advisor should be covered by indemnity insurance and referred to in the agreement.
• The settlement agreement is not legally binding until you and your employer have both signed the document and the solicitor has completed their certificate.

The detail within an agreement will vary depending on the situation at hand.  The most common clauses in an agreement will include:

• Termination Date – confirming the date that your employment will end.
• Termination Payments – this will detail the payment you are due to receive and any other outstanding payments due to you, such as accrued holiday or payments in lieu.
• Waiver of Rights – this will list the claims that you are no longer able to bring against your employer upon signing of the agreement.
• References – it is important that you clarify with your employer how references will be provided for in the future so as not to impact your employability.
• Confidentiality Clause – this will bind you to an agreement that you will keep the fact of and details of the settlement agreement confidential and usually the obligations of confidentiality that applied during your employment will be reiterated to apply post termination.
• Restrictive Covenants – you may already be bound by the terms of your employment contract to restrictions on your employment post termination and these may be re-iterated in the settlement agreement. It may be that your employer wishes to impose these on your termination: to restrict your movements after your employment, either relating to the sector, businesses or location you work in, or restricting the contact you have with former clients or colleagues. In addition to the terms of the settlement agreement, we will also advise you as to the enforceability of such covenants.
• Tax – the agreement will include the tax implications and any indemnity of behalf of the employee. We can advise you on the general implications and position but you may need to seek accountancy or tax advice on your individual position.
• Derogatory comments – you will be expected under the terms of the agreement to not make any derogatory comments about the business once your employment has come to an end. This should be reciprocal.

This will also depend on the circumstances surrounding the offer of the settlement agreement.  Several factors that will be considered by your employer will include:

• The length of time you have been employed.
• The reasons why the agreement is being offered.
• The potential financial, reputational and resource impact on the business if you were to pursue an Employment Tribunal claim against them.

This can be a complicated area and we will discuss with you in detail the payments involved and any tax implications.  Any payment you receive will be split into two areas:

1. Contractual settlement – anything paid to you under your contractual terms will be treated as a normal payment and be subject to the usual tax and National Insurance.
2. Compensatory payments – this would refer to any payments made as compensation for you entering into the settlement agreement – as a rule, the first £30,000 of this termination payment is paid to you tax-free, as long as your employer is making the payment to you on what is known as an “ex gratia basis”. This means that your employer has decided to make this payment opposed to it being a legal obligation.