Settlement agreements are usually offered by an employer to an employee as a means of definitively ending their relationship while settling any disputes and claims. These agreements often involve a sum of money offered to the employee in exchange for relinquishing certain rights to bring legal claims against the employer.
Settlement agreements are a diverse and complicated business, reflecting the individual situations between employer and employee. Because of this, if you are involved with or have been offered such an agreement, it is imperative that you seek our legal advice at the earliest juncture. This page will outline the top-line information regarding settlement agreements that you need to be aware of.
While Manak Solicitors can advise you on the realities of the terms presented in settlement agreements and help you negotiate, the decision on whether or not to sign is entirely yours.
Payments and taxes
While each agreement is different, on top of a lump sum compensation payment, you would usually expect the following under a settlement agreement:
- Full salary and benefits until the date of termination
- Payment in lieu for any untaken holiday accrued
- Payment in lieu of your notice, provided you are not working it
Usually, any compensation payment up to £30,000 is tax free, while payments above this are subject to tax and National Insurance contributions. However, the taxable status of your payment is determined by HMRC, so keep in mind that your employer may require you to enter into an indemnity in relation to the tax status of the payment.
Other potential terms in settlement agreements
Because the agreement between employer and employee is a commercial one, it is open to be negotiated based on the specific issue or situation between the two parties.
It is imperative that you insist that anything that you are expecting, or has been promised by your employer, is included in writing within the agreement. This is a situation where seeking external legal advice is integral; our team of employment solicitors can take your expectations or concerns and ensure that they are fully and clearly laid out in the final written agreement.
Common stipulations in settlement agreements include but are not limited to:
- Agreed compensation payment
- Agreements not to bring each other into further disrepute. This can apply even to spreading false information or gossip.
- Arrangements for shares
- The nature of any agreed announcement
- Any discretionary bonuses
- Waiver of restrictive covenants
- Outplacement support
After signing a settlement agreement and exceptions
Once both parties have signed a settlement agreement, it becomes legally binding. The employee will no longer be able to pursue claims against the employer or any other affiliated parties included in the agreement. That said, the employee does have certain claims that they can still make regarding the settlement agreement post signing:
- Enforcement of the terms of the settlement agreement
- Personal injury claims that the employee was not aware of during the signing of the original agreement
- Claims about accrued pension rights