Settlement Agreements for Employees
Introduction
As a settlement agreement specialist solicitor, with 20 years of experience, I know the concerns and queries most employees have when they first get offered an agreement by their employer. The purpose of this article is to address those queries, and link to the wider resources across the settlementagreement.co.uk site, which provide more detailed guidance on related topics.
Settlement Agreement Process
Your employer will draft the settlement agreement or instruct their legal advisers to do so. They will then set out the offer to you and provide a copy of the draft settlement agreement.
You will need independent legal advice from a qualified adviser, e.g. a solicitor. This is a legal requirement – without this advice your settlement agreement will not be valid. Your employer should also give you a reasonable period of time to obtain advice from a solicitor.
Usually, after the solicitor has gone over the agreement with you, the next step is to arrange signing the agreement if you are happy to proceed. Or your solicitor can go back to your employer on your behalf, if there are any amendments needed, with a view to updating the agreement before moving on to sign and complete the process. Our solicitor team are able to arrange signing electronically, to speed up the process.
Once the agreement is dated and signed by you and the employer, along with your solicitor’s signed legal adviser certificate, the settlement agreement is legally binding. At that point, there is no going back or cooling off period.
What is a settlement agreement?
A settlement agreement is a contract between an employee and employer under which the employee settles employment claims, usually agreeing to end their employment. In exchange, the employer will agree to make payments and / or provide non-financial benefits, such as a reference. The employee also gives non-financial commitments regarding confidentiality, non-disparagement, and return of company property, amongst others.
Settlement agreements must satisfy certain technical conditions to validly waive statutory claims, for example claims for unfair dismissal or discrimination under the Equality Act 2010.
Why do I need a solicitor?
To achieve a binding settlement agreement, the law requires the employee to be advised by a qualified independent legal adviser, for example a solicitor.
Who pays for the employee’s solicitor advice?
It is standard practice for the employer to contribute, usually paying around £500 or more, towards the costs of you getting advice.
What payments will I receive if I sign a settlement agreement?
The payments will be detailed in your settlement agreement. What you are entitled to depends on your particular situation, your employment contract, and the reason for your employment ending. Usually, a settlement agreement will confirm the employee will receive the following payments:
- Accrued wages and benefits up to the termination date.
- Accrued but untaken holiday entitlement.
- A payment in lieu of any unworked notice entitlement. Depending on how your employment contract is drafted, this may be basic pay only.
- Bonuses or commissions the employee is entitled to. Checking the bonus contractual terms is important to establish entitlements.
- A redundancy payment, if the reason for termination is redundancy and the employee has the qualifying service.
- A termination payment for loss of employment, also called an ‘ex-gratia’, ‘compensation’, or ‘severance’ payment.
- Payment towards the employee’s legal fees.
There may be provision for other benefits and payments, depending on the employee’s entitlements and situation, for example, clauses covering shares, share options, Long-Term Incentive Plans (‘LTIPS’), Restricted Stock Units (‘RSUs’), outplacement, retention of benefits such as company car, and private health insurance.
Our calculator tools:
Settlement Agreement Calculator
When do I receive the payments?
This depends on how your agreement is drafted. Usually, the termination payments are made on the next available payroll after the termination date and the return of the signed documents.
Do I have to sign a settlement agreement?
Settlement agreements are voluntary. However, as settlement agreements usually include an enhanced severance package, if you turn the offer down you will lose the benefits of the settlement agreement. Depending on your circumstances and situation, your employer may then continue with their internal processes, for example a redundancy consultation, or disciplinary procedure, performance improvement plan (known as a ‘PIP’), or an ill-health capability procedure.
Are settlement payments subject to tax and national insurance deductions?
£30,000 Tax Free Allowance
Generally speaking, the first £30,000 of a termination payment for loss of employment can be paid tax-free. This tax-free slice is inclusive of any redundancy pay entitlement.
Post Employment Notice Pay
However, if the employee has not fully worked or been paid in lieu of notice, an otherwise tax free termination payment may be subject to income tax and employee national deductions (‘PAYE Deductions’) by taxing what is known as Post Employment Notice Pay. There is a formula that needs to be applied but broadly speaking, the amount that will be subject to PAYE Deductions is equal to the unworked / unpaid notice entitlement.
Consideration for Restrictive Undertakings
If your settlement agreement contains new restrictive undertakings, for example, post-termination restrictions confirming that you agree not to solicit or deal with your employer’s customers, the ‘consideration’ you receive, i.e. monies, for agreeing to those, is subject to PAYE Deductions.
Retirement Payments and Tax
If you’re in a retirement situation there may be a risk the termination payment is not tax-free.
Other payments
Wages, notice pay, payments in lieu of notice, holiday pay, commissions and bonuses, are subject to PAYE Deductions.
Payments towards legal costs and outplacement support may be tax-free subject to certain conditions.
What non-financial obligations will an employee typically have under a settlement agreement?
These will usually centre around keeping the employer’s information confidential, treating the settlement agreement itself as a confidential, not bad-mouthing the employer or its people or communicating anything derogatory or disparaging, providing future assistance with internal investigations and litigation, returning company property, and deleting confidential information on personal devices.
Permitted disclosures
Most settlement agreements contain a list of exceptions to the general obligations of confidentiality and non-disparagement, known as permitted disclosures. These include being able to speak to your immediate family provided they agree to maintain confidentiality, and provide information to your solicitor and other professional advisers, including your doctor, counsellor and therapist.
The law or regulatory rules prescribe that certain types of permitted disclosures should still be allowed, or that any confidentiality clauses, also known as Non-Disclosure Agreements, are void to the extent that they would otherwise prevent such disclosures. We cover the typical list of permitted disclosures in our confidentiality and NDA guide.
Will I receive a job reference if I sign a settlement agreement?
Most settlement agreements say a standard reference will be provided on request from a prospective employer and annexe a copy of the reference wording to the settlement agreement. If you want to understand more about your rights to a reference, or you work in a regulated industry or role, read our detailed guide on references.
Something is missing in the settlement agreement
It’s really important that you let your solicitor know if something is missing so appropriate amendments can be requested. Tucked away at the end of most settlement agreements is an entire agreement clause. This says the settlement agreement overtakes all prior agreements and discussions. Therefore, if you have entitlements or have been promised something, for example a bonus payment, and it’s not covered in the settlement agreement, you will lose your entitlement if it is not covered in the settlement agreement.
I’m concerned the post termination restrictions will prevent me securing a new job
It’s important to understand the meaning and extent of the restrictions, to establish whether they are a problem. If there are any issues, your employer may agree to including a clause in the settlement agreement, which releases you from one or more of the restrictions, or to reduce their scope, for example reducing the period of restriction. Your solicitor will be able to advise you on the enforceability of the restrictions and how best to approach seeking a release, if required.
Will I be able to bring any claims if I sign a settlement agreement?
The settlement agreement must specify the particular statutory employment claims being settled. For this reason, it is common practice to list all of the claims in a schedule to the agreement. However, there are three claims that are usually excluded from the settlement:
- Claims to enforce the settlement agreement.
- Claims in relation to the employee’s accrued pension rights.
- Claims in relation to personal injuries of which the employee did not know about nor could they reasonably have known about (and which could be brought in the courts).
A settlement agreement is also incapable as a matter of law of settling a handful of specific claims which we cover in our guide: Which claims cannot be settled?
Who is responsible for any extra tax?
You employer’s legal counsel should have drafted the agreement properly so there shouldn’t be any excess tax payable. However, it is standard practice for settlement agreement to state that if the employee has received payments without deductions and it is later determined by HMRC that those should have been taxed, that the employee will be solely responsible for any extra income tax, employee national insurance or interest or penalties HMRC determines.
Will I ever have to repay the termination payment
Warranties
Your settlement agreement will contain clauses that say ‘The Employee warrants that as at the date of the agreement…”
A warranty is a contractual statement, or promise, that something is true. Settlement agreements usually include warranties from the employee to employer. If the warranty is given untruthfully, the agreement will be drafted in such a way that the employer will be entitled to repayment of the termination payment.
For this reason, it’s essential that the employee understands the warranties they are giving and can confirm they can give the warranties truthfully. If they cannot give a warranty the employee must let their solicitor know so the solicitor can advise on seeking removal or amendments of the warranty.
Promise not to bring claims
The employer will expect the employee to repay the termination payment (and possibly any payment in lieu of notice) if you bring a claim you have agreed not to bring.
If you abide by the settlement agreement terms, and you truthfully and honestly give the warranties, repayment should not be an issue.
Re joining your employer or an associated company
Sometimes a settlement agreement will say if you re-join within a set period of time you have to repay some or all of the settlement agreement.
Why do employers use settlement agreements ?
Employer’s use settlement agreements as a way of safely agreeing an employee’s departure. The agreements can save time and allow an amicable parting, on agreed terms. Common situations where settlement agreements are used include redundancy, long-term sickness and ill-health, disciplinary and grievance cases.
We have produced the following bespoke guides that offer support to employees in each of these situations who’ve been offered a settlement agreement:
- Redundancy and Settlement Agreements
- Mutually Agreed Resignation Schemes
- Sickness, Disability and Settlement Agreements
- Disciplinary Proceedings and Settlement Agreements
- Grievances and Settlement Agreements
About the Author
John Hassells is an employment solicitor and Head of Legal at settlementagreement.co.uk. John acts for senior executives and employees in relation to settlement agreements and related legal issues. Before setting up his own law firm, John was an employment solicitor at one of the UK’s top law firms in the UK, and a partner and Head of Employment for a leading commercial law firm. John is a qualified solicitor, acting for individuals as a consultant solicitor through a fully authorised and regulated law firm. With over 20 years’ experience advising employees and employers on employment law matters, employment disputes and settlement agreements, John takes a leading role is producing and reviewing our legal content. John is member of the Employment Lawyers Association, regularly delivers employment law training and provides media comment on developments in employment law.
Legal Disclaimer
The contents of this article are intended to be be for general information purposes only and do not amount to (nor are they intended to be) legal, tax or financial advice or a complete or authoritative statement of the law nor should they be treated as such. No warranty or promise is given, express or implied, as to accuracy of the information on this page and no liability is accepted for any error or omission. You should instruct a specialist employment solicitor to advise you on your particular situation and not act or rely on the information on this page.
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For a confidential chat with a specialist employment solicitor please call 0800 861 1883 or request a call back.
