Settlement Agreements Made Easy

If you’ve been offered a settlement agreement, you might be in shock, worried, confused. For some people a settlement agreement offer brings relief, financial certainty and a chance to reboot. But however you feel about your settlement agreement offer, you’re bound to have questions.

Many settlement agreements are several pages long, and full of legal and technical gobbledygook. The aim of this guide, and in fact our entire website, is to make things as clear and simple for employees and access specialist settlement agreement solicitor for advice when needed.

So, here’s to making settlement agreements EASY!

Termination Payments – A payment made for loss of employment is usually described as a termination payment, or severance payment, or an ex-gratia payment, in the settlement agreement. A payment to compensate an employee for the loss of their employment can usually be paid without PAYE Deductions up to £30,000 provided the employee has worked their notice or been paid in lieu of notice in full. The excess balance of any termination payment over the £30,000 tax-free slice, should be paid less PAYE Deductions.

Other payments – made under a settlement may not be subject to tax deductions such as qualifying payments for outplacement or towards the cost of the employee’s legal advice on the settlement agreement. Equally, in some instances, a payment for injury or disability or injury to feelings may not be taxable but the rules and conditions on these types of payments are complex and we’ve produced a settlement payments tax guide with further information.

Main points about a settlement agreement

• What is a Settlement Agreement? A settlement agreement settles employment claims an employee may have and will mean the employee will not be able to bring employment tribunal and legal claims against their employer.

• What is a Compromise Agreement? The old name for settlement agreements – the name changed in 2013 but old habits die hard and you still hear people calling them compromise agreements!

• Is it confidential? Pretty much. Settlement Agreements usually contain some hefty clauses requiring the employee to keep the existence, terms and circumstances leading up to the settlement agreement confidential. There are some permitted disclosures we cover these in more detail in our guide on confidentiality.

• Why do employers use settlement agreement? To ensure employees don’t bring employment claims and move quickly. Whether its a redundancy, performance issue or sickness, employers sometime prefer to offer more money in exchange for peace of mind the employee won’t bring a claim.

• Do I need a solicitor? It’s a legal requirement for the employee to have independent legal advice on a settlement agreement, otherwise the agreement cannot lawfully prevent the employee bringing statutory employment claims.

• Who pays for the cost of a solicitor? Because its a legal requirement for the employee to have their own legal advice, employers will agree to make a payment to cover the cost of a solicitor advising the employee on the settlement agreement.

• How much does legal advice cost? Employers tend to offer between £250 and £750 ex VAT towards the cost of the employee getting independent legal advice from a solicitor on the settlement agreement.

• Who does the solicitor invoice for the advice I get? The solicitor you go with will act for you only (not your employer) and after the agreement is signed-off your solicitor will send their invoice to your employer for the agreed contribution, marked payable by your employer.

• Is a settlement agreement payment agreement tax-free? The tax position depends on the nature of the payments made under the settlement agreement.

• What do I do if I’m happy with the financial term and want to sign? If the settlement agreement is ready to sign you can go for our fast solicitor advice service.

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. Usually the agreement will also prevent an employee from bringing any contractual claims and/or common law claims.

Is the settlement offer fair and should I accept?

That depends on the offer, the strength of any claims, how long you’ve been employed and factors personal to you. If you are not sure about the financial offer terms you can use a settlement agreement calculator to help assess how much you should get.

In what situations are Settlement Agreements used?

Settlement Agreements are used in many employment situations, including:

Redundancy:

Settlement Agreements are often used in redundancy scenarios, where the employer offers to pay the employee more than the basic statutory redundancy pay entitlement. In exchange for paying more, the employer may require the employee to sign a settlement agreement.

Disciplinary:

The employer may not be happy with the employee’s standard of work. Rather than go through a formal performance improvement plan / procedure, the employer may decide to offer the employee an alternative to leave earlier in the procedure and receive a settlement payment under a settlement agreement.

Sickness / Incapability

If an employee is not capable of work because of illness or a lack of skill or experience, one option may be to agree to the employee leaving under a settlement agreement. Sometimes, both parties would prefer to agree an earlier amicable settlement rather than go through a long drawn out capability procedure that might end in dismissal.

Work relationship breakdown

Sometime the work relationship breaks down between the employer and employee, or the employee and colleagues. The parties may prefer to agree an amicable parting, where the employee receives a severance / termination payment.

Employee Grievance

The employee may have grievances and potential claims against the employer for the way she/he has been treated at work. Rather than bring employment claims, an agreement may be reached and recorded in a settlement agreement.

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.

I’m not happy with the financial terms

Some employees are not satisfied with the financial deal and/or the terms of the agreement and will instruct their solicitor to conduct settlement negotiations on one or 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.

Changes to the Settlement Agreement wording

You may want to make changes to the Settlement Agreement wording to protect you. For example:

• Adding a clause to require your employer to provide a reasonable job reference to a new employer;
• making sure all the payments, monies and benefits you are entitled to are covered (accrued salary, accrued holidays, bonuses, commission payments, shares, SAYE, private health cover, company car or car allowance). This is important because usually a settlement agreement will be drafted to be the entire agreement, meaning any payments or benefits not covered in the agreement will be lost;
• an agreed internal or external announcement to colleagues and customers;
• changes to the clauses dealing with tax (known as a tax indemnity);
• amending or removing post-termination restrictions that may make it difficult for you secure new work; and / or
• deleting clauses that are unreasonable / to remove or minimize risk.

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.

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.

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 rights. There is also 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.

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.

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.

Can we help?

For solicitor advice, please call 0800 861 1883.