Settlement Agreement Guide

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Top 20 Questions Employees ask about Settlement Agreements?

What is a Settlement Agreement?

A settlement agreement is a formal agreement between an employer and an employee dealing with the settlement of claims that the employee may have arising out of his/her employment or its termination. Usually an employee accepts a sum of money in return for agreeing not to bring certain legal claims against the employer.

Why do we have settlement agreements?

Settlement agreements are used to resolve employment disputes and/or end the employment relationship on agreed terms. They are an effective way of preventing or resolving employment disputes and provide certainty to both parties.

What is a Compromise Agreement?

This is the old name for settlement agreements. The re-brand happened in July 2013 alongside other related employment changes, for example, the introduction of ‘protected conversations’ (see question below).

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 have jurisdiction 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.

What are the 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.

What are the usual terms of a settlement agreement?

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

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.

How much does legal advice on a settlement cost?

Because the employer needs the employee to take independent legal advice (otherwise the settlement agreement would not be binding) its customary for the employer to contribute towards the cost. Typically the cost is between £250 and £500 (ex VAT) but for complicated settlements, it can be more. Our panel solicitors provide initial free advice and will often be able to limit their charges to to the amount your employer is willing to pay.

Why is my employer offering a settlement agreement?

There are lots of reasons. Some employers routinely use settlement agreements in redundancy exercises, when the employee take voluntary redundancy or is offered an enhanced package. But settlement agreements can also be used to avoid long-drawn out situations or possible disputes. By paying more under a settlement agreement the employer has the comfort of knowing it won’t get an employment tribunal claim.

Is my employer's offer fair?

The sixty four thousand dollar question! And one that can only be answered properly based on your situation and particular circumstances. A solicitor will assess the potential claims you have, their value and the chances of success. Consideration should be given to your contractual rights and the costs and fees associated with alternative courses of action, including employment tribunal or court proceedings.

Speak to a solicitor without delay so you can make informed decisions.

Should I try and negotiate a better deal?

Negotiating a settlement agreement
When employees are offered a settlement agreement, they should give careful consideration to what they want to achieve by signing such an agreement. Employees seeking advice broadly fall into one of three categories:

Happy with the deal and the terms
There is no legal requirement to advise on the merits of the claim or help negotiate the terms and some employees simply require the adviser to “rubber stamp” the agreement advising on the terms in accordance with the statutory requirements as outlined above.

Happy with the deal but not the terms
Some employees may be happy with the financial deal itself but are not happy with the other terms in the agreement as proposed by the employer. It is not unusual for the terms to be negotiated on before the parties reach agreement although this is likely to increase the fee your solicitor is charging. Whether terms can be altered will very much depend on the circumstances of the individual case and their bargaining position.

Not happy with the deal or the terms
Some employees are not satisfied with either the financial deal or the terms of the agreement and will instruct their solicitor to negotiate on both fronts. The ability to negotiate will very much depend on the circumstances and strength of the individual’s case. The stronger the legal basis for a claim, the more likely it is that employers will be receptive to negotiations to increase the compensation and amend terms in the employee’s favour.

Is the settlement (compensation) payment taxed?

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.

Read more: Is compensation for Injury to feelings taxed?

What is a protected conversation?

What does 'Without Prejudice Save as to Costs" mean?

What happens if I turn the offer down?

Can I be dismissed if I don't sign the settlement agreement?

Can I tell my family and colleagues my employer has offered me a settlement agreement?

if I turn the offer down and go to an employment tribunal can I mention my employer's settlement agreement offer?

Can I be a whistle-blower after I sign a settlement agreement?

What effect does a settlement agreement have on post-termination restrictions in my employment contract?

When am I paid the settlement agreement monies?

What is an ACAS COT3 settlement?

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.

Take the settlement agreement personality test

I'm happy with the deal and the terms

There is no legal requirement to advise on the merits of the claim or help negotiate the terms and some employees simply require the adviser to “rubber stamp” the agreement advising on the terms in accordance with the statutory requirements.

I'm happy with the deal but not the terms

Some employees may be happy with the financial deal itself but are not happy with the other terms in the agreement as proposed by the employer. It is not unusual for the terms to be negotiated on before the parties reach agreement although this is likely to increase the fee your solicitor is charging. Whether terms can be altered will very much depend on the circumstances of the individual case and their bargaining position.

Not happy with the deal or the terms

Some employees are not satisfied with either the financial deal or the terms of the agreement and will instruct their solicitor to negotiate on both fronts. The ability to negotiate will very much depend on the circumstances and strength of the individual’s case. The stronger the legal basis for a claim, the more likely it is that employers will be receptive to negotiations to increase the compensation and amend terms in the employee’s favour.

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