Settlement Agreements Solicitors

What is a Settlement Agreement?

Settlement agreements were previously known as compromise agreements. Employees may have claims against their employers. This can be during recruitment, whilst employed or on termination of employment. Employers will often make a payment to an employee in returning for the employee agreeing not to make claims against them. Settlement agreements are usually used to either terminate employment after a termination has taken place. The agreed terms are recorded into a written contract and signed by each party. This has the effect of preventing an employee from bringing claims against an employer as they have been settled by way of an agreement.

When is a settlement agreement offered?

Settlement agreements are most commonly offered typically at the end of employment. Often if employees work for larger companies, they will be offered enhanced terms if for example, there are redundancies to be made. There will often be a formula set out in a staff handbook which makes clear how redundancies will be dealt with. In order to be able to receive the enhanced sum, a settlement agreement will need to be entered into legally.

Settlement agreements are also commonly used when there are issues around employee performance or misconduct. Employers will often rather have an agreed outcome which results in an employee leaving the business rather than spending management time and costs on an issue which can take at the very least months to undertake in most cases. An employer may enter into a protected discussion with an employee whereby they can speak freely and make a genuine attempt to settle a case.

What are the benefits of a settlement agreement?

Settlement agreements have numerous benefits. As the agreement is documented, the terms of settlement will be set out clearly which gives certainty to employees and employees as to finances.  Employees will also be able to negotiate benefits which a Tribunal could not order such as a job reference with agreed wording. An employer will not need to worry that future claims will be brought against them which gives certainty to the business when planning their future. A settlement agreement can save the costs of litigation and stress. In most cases, even if an employer or employee succeed in a claim, they will not recover their costs. A settlement agreement can also be structured in the most tax efficient way to ensure maximum benefit. Lastly, it allows the parties to have a clean break and move on without having to continually dealing with a stressful or upsetting situation.

How furlough may affect settlement agreements?

A settlement agreement can be offered whilst an employee is on furlough. Redundancy pay must be at the full wage rather than furlough rate. However, if an employees notice period is more than the statutory minimum, this rule will not apply. As furlough payments will be coming to an end in September 2021, there will be pressure on businesses to cut costs and re evaluate their business structures which may lead to redundancies and more settlement agreements.

Why you need a solicitor during a settlement agreement?

A Solicitor is required for a settlement agreement as it is a legal requirement to be advised by an independent advisor. You will be advised as to the claims you may have against an employer and your ability to pursue those claims if you enter into a settlement agreement. These claims can be either contractual right which arise from your contract of employment, statutory rights which are claims which can be pursued in an employment tribunal and common law rights such as a personal injury claim.

A Solicitor will have the knowledge to guide you through the process and ensure that all aspects of an agreement are considered. They will also be able to advise you as to what is not included in the agreement that should be, such as a job reference with agreed wording.

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What makes a settlement agreement legally binding?

Section 203(3) of the Employment Rights Act 1996 sets out conditions that must be met for an agreement to be binding. The conditions are-

  1. The agreement must be in writing.
  2. The employee must receive legal advice from an independent adviser on the terms and effects of the proposed agreement on an employee and the ability to pursue those rights.
  3. The agreement must identify an adviser. This advisor must have a currently contract of insurance, or professional indemnity insurance.
  4. The agreement must state that the conditions regulating settlement agreement under the relevant statutory procedures have been satisfied.
  5. The agreement must relate to a particular complaint or proceedings.

If the terms are not met, any agreement is invalid. This leaves it open for either party to bring claims against one another, which will lead to stress and cost.

When entering into protected discussions, it is important that you are legally covered to speak freely without consequences provided that you are genuinely attempting to resolve the dispute. If this is not carried out correctly, any evidence can be used in legal proceedings.

Settlement Agreement FAQs

Some payments are taxable such as holiday and salary pay. Termination payments are tax free up to £30,000.

There is no correct amount or formula that is used to calculate how much an employee should receive. One should however take into account length of service, the type of disputes that exist, the risk as to litigation and the amount of compensation that a case could be worth once taking into account legal fees.

A settlement agreement is a voluntary process. An employee cannot be forced to sign an agreement if they do not wish to do so. If agreement is not reached, this will create uncertainty. An employee will consider pursuing grievances, subject access requests or bringing claims in a Tribunal or Court. An employer may consider pursuing a dismissal for misconduct or capability. Should there be a dismissal, this can have an impact on whether an employee will be able to obtain work with another employer given that they will require a reference.

If an employee breaches a settlement agreement, this can result in a letter being sent to the employer making them aware of the breach and requesting that the termination payment is returned. Should the employee refuse to pay, this is likely to result in court proceedings whereby a breach of contract claim will be brought.

There are various issues that are raised in settlement agreements that we see time and time again.

Termination Date- This is the agreed last day of employment for an employee. This can have an impact on tax planning and the amount of salary received.

Salary and Benefits- Employees are paid their salary and contractual benefits until the termination date. The benefits can sometimes be extended beyond termination, for example, to take into account any notice period that would have taken place if notice was worked. These are usually taxable payments.

Garden Leave- On some occasions, employers will prefer employees to be on garden leave rather than work in the office. This means that the employer has no duty to provide an employee with work but can call upon an employee when required. The employee will receive their salary as usual.

Notice Period- Your notice period will be determined by your contract of employment. This cannot be less than the statutory notice period dependent on the years that an employee has worked for an employer. This is usually a taxable payment.

Termination payment- This is the money an employee receives in return for not bringing claims against an employer. Up to £30,000 is tax free. This will usually be paid within 28 days of the termination date provided the agreement is correctly completed and there are no breaches in contract.

Payment of notice in lieu- This is whereby an employee does not work their notice but is paid the equivalent payment to leave sooner. This can have ramifications on contractual benefits as you are only entitled to them as an employee.

Pension- An employee’s pension payments will be paid until the termination date into the usual scheme. Again, sometimes it can be negotiated that you receive the benefit of any notice period pension payments if you are paid notice in lieu.

Company Car- Sometimes you can negotiate to continue using the company car until the termination date or even beyond this point.

Outplacement- This will be whereby an employer pays for you to receive assistance and/or counselling to assist in finding a new job. There will be a specified amount of money for this or they will already have links with an established provider. In certain circumstances, you may be able to negotiate that you receive the equivalent cash value rather than use this benefit but it is not always possible.

Legal fees- This will set out how much your employer will contribute for you to receive legal advice. An invoice will be made out to an employee but payable by the employer and sent to them.

Waiver of claims- This is where an employee agrees not to bring any claims against an employer save for any latent personal injury claim, any enforcement of the agreement or accrued pension rights.

Warranties- These are promises by an employee to an employer which forms part of the basis of the agreement. This can be for example, that an employee promises they have not committed gross misconduct.

Advisor- This is the independent person who will be advising the employee. They must be insured and competent to give advice not only on possible claims but the meaning of the clauses to an employee. They must also ensure the agreement is properly drafted.

Tribunal Proceedings- it is usual to agree that claims will not be brought to the Tribunal against the company or employees. This after all does give certainty, the main objective of a settlement agreement.

Employee Indemnities- As an employee is receiving a tax-free termination payment, it will be for them to indemnity an employer as to any tax owing if it is determined that the agreement is a tax avoidance scheme and therefore payable. This is a minor risk. Equally, if an employee does not keep their promises, such as not brining a tribunal claim against their employer, the monies paid to them can be recovered along with legal fees.

Company property and information- An employee will need to return any company property that they hold to the employer. There can be various ways this is carried out such as returned in person or by courier. The expense of returning can sometimes be passed onto an employer. With confidential information, it is often a term that confidential information cannot be used, disclosed to third parties or copied. Confidential information would be for example businesses plans or strategies that an employee has come across during their employment. It will often be a term that confidential information must be deleted irretrievably on personal devices.

Reference- it is always recommended that a reference is agreed with an employer. This means that the exact wording will be attached as an appendix to the agreement. An employee would also normally negotiate that any oral reference must be consistent with the written reference agreed.

Restrictive covenants- These are clauses which stop an employee from carrying out an action, such as working for a competitor or with clients. It is important to have these clauses properly checked and negotiated out, if possible, to ensure that employees are free as possible to pursue their career. A restrictive covenant should only go far as necessary to legitimately protect an employer’s business.

Announcements- An agreed announcement sometimes is formalised which can be sent to staff or clients by email so that communication of an employee leaving is handled sensitively and correctly.

Confidentiality as to the agreement- This will be a clause whereby the agreement should be kept confidential save for some exceptions such as immediate family members or the adviser.

Whistleblowing- Despite leaving employment, an employee can still report misconduct to a regulator, make a protected disclosure or assist the police/cps with a criminal prosecution.

Superseding agreement- it will usually be a term that the settlement agreement is the final agreement between an employer and employee and therefore any terms outside of this in the past are no longer applicable.

 Variation- Agreements can not be varied unless signed for by both parties.

Governing law and Jurisdiction- This will usually be England and Wales. This means that if there are any disputes, the claim must be brought within England and Wales.

Subject to Contract and Without prejudice- Subject to contract in essence means that the agreement is not complete until all parties sign the document. This can be signed electronically or with wet ink. Without prejudice means that any communications that are entered into cannot be relied upon in Court provided that there is a genuine attempt to settle.

Reaffirmation- Sometimes if an employee agrees a settlement early but still has a long time to work, they will be required to reaffirm the clauses in the agreement to cover the time passed until termination. This will usually involve signing an additional schedule.

As settlement agreements are confidential, they should not impact on your employability. An employee will usually agree a reference and agreed reason for leaving and as such will be in control of the narrative set out to future employers during any interview process. The agreement will set out what can be disclosed. An employee should not have any issues. Usually there will be a clause around the parties not denigrating each other or causing loss of reputation.

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