What is a settlement agreement?
A settlement agreement is made for the purpose of an employer and an employee to agree terms under which the employee waives their right to bring certain claims against the employer. They can be used to dismiss you from your employment and are often used to negotiate a claim you are bringing in a court or employment tribunal.
A settlement agreement can be suggested by either an employer or an employee to part from a company on agreed terms.
A settlement agreement is a distinct type of legal agreement between employer and employee, which sets out the terms of an ‘agreement’ both parties have made to settle a dispute amongst them.
Typically, the employer pays the employee an approved sum of money that they would not usually be eligible for and the employee agrees to waive his / her right to bring any claim in relation to their employment or the termination of their employment. This payment is then considered as compensation for the employee’s potential claims. For example, an employee who has been given notice of dismissal for redundancy may disagree with the criteria used to make them redundant but is prepared to settle their claim between themselves, as an alternative of bringing an employment tribunal claim for unfair dismissal.
Why do employers offer settlement agreements?
Generally, an employer will offer a settlement agreement to guard itself from claims against an employee. The most usual claims an employer will seek to protect itself from are claims of discrimination, unfair dismissal, wrongful dismissal, holiday disputes, breach of contract and harassment. A settlement agreement means claims and disputes are settled in a legally binding document and everyone can move on quickly.
When are they used?
Settlement agreements are used by employers when they are wanting an employee to exit their employment. This can take place in group scenarios or individual scenarios:
Group Scenarios – a settlement agreement can be used for a group of employees being made redundant, and whereby the employer would like to offer an enhanced termination payment for their voluntary redundancy.
Individual Scenarios – a settlement agreement can be served to an individual employee due to their performance, incapability due to illness, disciplinary or redundancy procedure.
Offering a settlement agreement can be an effective and a less costly alternative to having claims brought against you and a quick way to terminate employment safely.
Upon signing the agreement, the employee agrees to settle the statutory claims listed in the agreement. It is normal procedure for there to be a considerable list of claims, for example, breach of contract, constructive dismissal, unfair dismissal, claims for discrimination under the Equality Act, redundancy, etc.
When is a settlement agreement valid?
A settlement agreement is effective to avoid an employee from bringing proceedings only if:
The settlement agreement is in writing.
- it relates to the specific complaint or proceedings of the employee;
- the employee must have obtained independent advice from a relevant adviser (such as JMR Solicitors) as to the terms and result of the proposed agreement;
- advice will be given on the effects of the settlement agreement and your ability to pursue your rights before an employment tribunal;
- the adviser must be covered by professional indemnity insurance;
- the adviser is acknowledged in the agreement; and
- the agreement includes that the related statutory conditions regulating settlement agreements are fulfilled.
Settlement agreements were known as compromise agreements before 29 July 2013.
What is included in a settlement agreement?
Each settlement agreement varies, and the terms are only definite once any discussions have taken place. However, a typical settlement agreement will include:
- payment including notice pay, and any annual leave pay you are due;
- any employment contractual benefits, bonuses and shares you are owed;
- the amount you get as termination payment (usually also known as compensation or ex-gratia payments);
- non-disclosure agreement clauses;
- information on the waiver and settlement of employment claims;
- information on any payments that will be subjected to tax and those which are exempt of tax, plus your national insurance deductions;
- Recommendations on internal practices such as work handovers, resignation of directorships, return of property;
- Legal costs;
- repayment of termination payment from the employee if they start a claim or breach the agreement, and
Is a settlement agreement the same as redundancy?
A settlement agreement is not the same as redundancy. A redundancy is a company deciding that they have a fair reason to end the employee’s employment contract but does not always involve a settlement agreement. If an enhanced redundancy package is offered, then the employer can ask them to sign a settlement agreement.
Are Settlement Agreements tax-free or taxable termination payments?
Compensatory payments made for loss of office or loss of employment are exempt from tax on the first £30,000.
If the Settlement Agreement comprises compensation that exceeds the £30,000 tax free exemption the employer has to deduct tax at the OT tax code rate which may mean making deductions at different rates from 20% to 45% depending on the size of the excess. The OT Code does not include any personal allowances and divides the different tax bands into twelfths.
How to protect a settlement agreement conversation?
If negotiations meet a hurdle and they cannot move forward, then one party might want to refer to what was discussed in the settlement offer. If the conversation was not protected, then it can be used as leverage in negotiations to support an unfair dismissal claim.
If a letter or discussion is without prejudice, then it cannot be used in any legal proceedings including an employment tribunal claim. This permits the parties to talk honestly without fear the conversation will be used against them, where they wish to settle an existing disagreement or considered legal proceedings.
There are two ways a settlement offer will be protected, i.e. precluded in legal proceedings:
- It is without prejudice; and/or
- It is a Protected Conversation.
How does an offer become Without Prejudice?
For the without prejudice rule to stand, there must be:
- an existing dispute or thought of a claim / legal proceeding; and
- a conversation with the intention to settling that dispute, i.e. an offer to settle.
What is a Protected Conversation?
In some cases, even if the without prejudice rule does not apply, the offer may still be disallowed in relation to ordinary unfair dismissal claims only – if it is considered to be a protected conversation (Section 111A ERA 1996). That means the conversation about settlement is open for the purposes of other claims, for example discrimination (unless the without prejudice rule applies).
A protected conversation happens where a proposal of a settlement agreement is made. Still, if the employer acts unsuitably, for example by placing unwarranted pressure on the employees to accept, or falsifying the circumstances, an employer will lose protection and the employee may mention to the settlement agreement discussion in an unfair dismissal claim.
Who can advise on a settlement agreement?
You must obtain advice for a settlement agreement or it will not be valid.
Advice can be given by:
- a qualified lawyer (or certified legal executive);
- a certified and approved officer, official, employee or member of a trade union; or
- a certified and official worker at an employment advice centre who is not paid for providing advice to the employee.
- The legal adviser must be clearly identified in the agreement.
JMR Solicitors can provide employees with independent advice on their settlement agreements.
Do employers pay legal fees for settlement agreements?
Although there are no customary guidelines for this, usually you will find that most employers will subsidise towards the employee’s legal fees. Any fees beyond what the employer contribution is, will generally be payable by you (although it is often possible to negotiate a bigger contribution with the employer).
Please note that employers will only contribute to your legal fees if the agreement is signed by an employee. If you choose not to go ahead, the employer will not contribute towards the fees.
Should I accept a settlement offer?
You should remember that a settlement agreement does not have to be signed right away. You should be given reasonable time by your employer to consider the terms, to take the legal advice necessary and make an informed decision.
We recommend you talk to an employment solicitor and consider your options.
Can I negotiate a settlement agreement?
Potentially you can negotiate a settlement agreement, and better if you seek legal advice when doing so.
An employer perhaps is not going to be influenced to raise the offer meaningfully unless you can communicate the strength of your case. This is the main reason why an employment solicitor will be aware of the law and advise you best on how to negotiate your offer.
How do I respond to a low offer?
If you are not happy with the offer as it is nowhere near the figure you had in mind to accept, then you might want to reject the offer, and explain why you are not making a counter offer because the original is far from what you expected.
The other way to deal with a low settlement agreement scenario is to make a practical and sensible counteroffer. It is important that the offer is sensible because this will make the negotiations a lot easier.
Settlement agreement Calculator
These six features will help you to calculate your settlement agreement value:
- Your length of service.
- Length of Notice entitlement.
- How long it takes to secure a new job.
- Potency of Claim.
- Employer approach to settlement.
Sickness and Settlement Agreements
If a long-term illness means an employee cannot carry out their duties, the employer will possibly think about ending the employees’ employment.
The ending of their employment may be done with a settlement agreement to avoid the employee bringing a claim forward which might come under disability discrimination as well as unfair dismissal. If the employer is considering a settlement agreement to end their employment, then all of these should be given due consideration to:
- Have they had their full sick pay entitlement?
- Have they accrued any annual leave?
- Does your company offer Permanent Health Insurance or Critical illness cover?
- If you offer Permanent Health Insurance, then it should be considered as an alternative to ending their employment
- Pension and ill health retirement perks offered by the employer
- Can they perform any alternative roles, if you do not offer a suitable alternative role that the employee may have been fit to complete, then they will have a case for unfair dismissal?
- Did the employer make reasonable adjustments under the Equality Act 2019 to facilitate a return to work?
Redundancy and Settlement Agreements
Voluntary Redundancy: This is typically offered with an enhanced redundancy payment and offer early in the redundancy process. If the employer takes up the offer of voluntary redundancy, then they will expect an enhanced payment package which means they will not need to serve a notice period. In place of paying in lieu they will get a settlement agreement to avoid future disputes.
Compulsory Redundancy with Settlement Agreements:
If the employer carried out a full redundancy consultation and then serves notice to terminate the employment due to redundancy of role, then they may offer an enhanced redundancy package to accompany this. This will often include a settlement agreement in exchange for the enhanced payment or package.
Confidentiality and Non-Disclosure Agreements:
Non-disclosure agreements and confidentiality clauses are normal part of settlement agreements. They cannot stop the employee from whistleblowing though or speaking to the police if they feel there has been criminal misconduct at work.
The employee’s solicitor can advise the employee where the agreement pursues to unsuitably prevent public interest disclosures and seek amendments to the agreement.
If the arranged termination date is a considerable time after the settlement agreement is signed, an employer might decide they need a second agreement to stop potential claims coming forward after the first settlement agreement was signed.
This is generally named a reaffirmation certificate or agreement because the employee is asked to reaffirm the waiver of claims.
Post-Employment Notice Pay
Post-Employment-Notice-Pay (‘PENP’) – In short, as of April 2018, the practice of uniting the value of notice pay into a global termination payment so it can all be paid tax free has been stopped. Currently, if the employee does not work their full notice period or get paid in lieu of their full notice, any termination payment will generally need to be taxed up to the value of unworked / unpaid notice entitlement. This means an employer will need to commence a PENP calculation to work out how much tax needs to be subtracted from the termination payment.
Rules for PENP:
- If the employee serves their full notice period, then the PENP will be nil.
- If a full contractual payment in lieu of notice is made the PENO will often be nil.
- If the notice period is partly and the full balance is paid in lieu, then the PENP will be nil.
- It is suggested that a PENP calculation is done to correctly assess the tax charge due (if any).
Obstacles to watch out for:
Long-term sickness – the employee has been on long term sickness and has exhausted all sick pay or is only receiving reduced pay or statutory sick pay.
Salary Sacrifice – these impact on the usual PENP calculation.
Retirement – retirement payments fall under a different tax provision and may be taxable.
Redundancy payment only (i.e. no payment in lieu of notice / no notice served).
Contact JMR Solicitors for all Settlement Agreement matters
For all matters related to settlement agreements, redundancy, PENP, sickness and settlement agreements, contact JMR Solicitors on 0161 491 3933 or email us on firstname.lastname@example.org
Our employment law team have vast experience in settlement agreement issues.