What is the effect of a entering into a Settlement Agreement?
By entering into a valid Settlement Agreement an employee agrees to give up certain legal rights usually in return for a severance payment or package. The main effect of the agreement is that an employment tribunal will no longer be able to hear the claims listed in the agreement and an employee will be precluded from bringing these claims. Depending on the terms of the agreement, it may also prevent an employee from bringing any contractual claims and/or common law claims.
Why do I need advice from a solicitor?
if you sign the Settlement Agreement you will not be able to bring a claim in the employment tribunal or courts. It’s therefore really important that you get advice so you know what claims you have, how valuable they are, so you can make an informed decision about whether to accept the settlement agreement offer.
Your employer also has an interest in you obtaining advice from a solicitor because otherwise the written agreement (even if signed by you) will not legally prevent you from bringing statutory employment claims, for example unfair dismissal or discrimination.
Who pays for the employee’s solicitor?
It is normal practice for the employer to make a contribution towards the cost. The solicitor will send the invoice directly to your employer, after the Settlement Agreement is concluded. An employer’s contribution may vary. Usually an employer will offer between £250 and £750 excluding VAT. But the contribution can be more in some instances. Many of the solicitors in our ‘find a solicitor’ directory will agree to limit their charges to the employer’s contribution, so you don’t have anything to pay. But check with the solicitor.
Legal requirements of a Settlement Agreement
To protect employees who may be unaware of their legal rights, the law states that Settlement Agreements are not legally enforceable unless they meet certain minimum requirements:
- The agreement must be in writing.
- The agreement must relate to ‘particular proceedings’ i.e particular complaints that the employee may have.
- The employee must identify a relevant independent adviser from whom the employee has received advice as to the terms and effect of the proposed agreement and in particular its effect on the employee’s ability to pursue their rights before an employment tribunal.
- The adviser must be covered by professional indemnity insurance.
- The agreement must state that the legal conditions regulating settlement agreements are satisfied.
If the agreement does not comply with these minimum legal requirements, it will not be valid and an employee will still be able pursue a claim against their employer, although he/she will probably have to repay any monies received, or they will be deducted from any compensation the employee is awarded.
Learn more: common mistakes made in Settlement Agreements
What terms might a Settlement Agreement include?
The terms included in a Settlement Agreement will vary depending on the circumstances of the particular case. However, it is common for Settlement Agreements to contain clauses dealing with the following:
- The date employment terminated
- List of claims settled
- Settlement package including when payment will be made and by what method
- Parties understanding of the tax position
- Tax indemnity from the employee
- Reminder of any restrictive covenants or confidentiality obligations in the contract
- Confidentiality about the fact, content and circumstances of the agreement
- Obligations on the employee or both parties not to make or publish any derogatory comments
- An agreed reference
- Repayment provisions for breach by the employee of the settlement agreement
- Employer contribution to the cost of obtaining legal advice on the terms of the agreement
- Arrangements on termination
Guide: The usual terms you find in a settlement agreement (explained)
Ask an Expert: Am I entitled to a job reference?
Are there any claims that cannot be settled by a Settlement Agreement?
Not all claims can be settled by means of a Settlement Agreement, for example the right to statutory maternity, paternity and adoption pay and claims under the Agency Workers Regulations 2010. It is also usual for an agreement not to compromise an employee’s accrued pension right. There is usually a clause dealing with personal injury claims stating either that the agreement does not affect any personal injury claim that the employee may have or a clause signing away the employee’s right to pursue claims for injuries of which he/she is already aware.
Resource: A list of statutory claims that cannot be settled under a settlement agreement.
Is a Settlement Agreement legally binding?
The agreement is legally binding when it meets the legal requirements as identified above and is signed by both parties.
Is tax payable on the compensation payment?
The tax position depends on the nature of the payments made under the agreement. Generally the first £30,000 of compensation for loss of employment is not subject to tax or employees’ National Insurance contributions. Payments made over £30,000 are subject to tax.
Ask an Expert: Are settlement agreement tax-free?
Other methods of settling claims and/or ending the employment relationship
Where an Acas conciliation officer assists in the negotiation of the settlement of an employment tribunal claim (or potential claim), a COT3 agreement is used to record the terms of settlement. A COT3 agreement is a much simpler straightforward agreement that does not have to adhere to the formalities of a settlement agreement because it is negotiated with the assistance of an Acas conciliation officer.
Learn More: Settlement Agreement Hub
IMPORTANT: The contents of this page are general guidance only and should not therefore be regarded as constituting legal or other advice. You should seek legal advice from an employment solicitor about your particular situation without delay. We are not a law firm but we work with a panel of specialist solicitors.