Settlement Agreements
Rollits’ employment team regularly advises both employers and employees in respect of settlement agreements.
For employees, we ensure that the individual is receiving appropriate compensation in return for compromising their claims and the termination of their employment, and that the terms and effect of the agreement is fully understood.
For employers, we provide all advice and guidance required to complete an employee exit and ensure that the required “protected” and/or “without prejudice” conversation is followed.
Settlement Agreement
There are only two ways that an employee can legally compromise their ability to bring employment tribunal claims, one is a COT3 agreement through ACAS, the other is a settlement agreement.
A settlement agreement, previously called a “compromise agreement”, is a legal contract between an employer and employee which typically governs the termination of the employee’s employment and the employee’s ability to bring future claims against the employer. A settlement agreement can also be used to resolve an ongoing dispute within the employment relationship, with employment continuing.
Legal requirements
There are strict statutory requirements that must be met in order to establish a legally binding settlement agreement, including that the employee must receive independent legal advice as to the nature and effect of each of the terms of the settlement agreement. The legal adviser will sign an “Adviser’s Certificate” to confirm that they have provided the relevant independent legal advice to the employee.
Main clauses
Main clauses will be included within a settlement agreement, for example, there will be a Termination Date stating the date employment will terminate.
The Termination Payment/ Severance Payment details the proposed payment to the employee. This payment is made in return for the termination of the employee’s employment . This can be paid tax-free up to £30,000 provided notice and other contractual payments have been properly accounted for and the sum is not disguised income for anything else.
The waiver of claims is an important clause which governs the claims the employee is compromising when entering into the settlement agreement. Typically, the claims waived are all claims arising out of the employment or its termination. It is common for a long list to be included here, although certain claims (e.g. latent personal injury and accrued pension rights) should not be waived.
Other Clauses
Settlement agreements should deal with any notice entitlement appropriately before any tax-free termination payment is made. For example, if the employee is entitled contractually to one month’s notice, the agreement may set out that the employee is going to be paid in lieu of that notice or alternatively state that notice was served on a specific date, and the employee will have worked their period of notice by the Termination Date - however there must be evidence that notice was properly served and the parties cannot retrospectively agree that it was.
A tax indemnity for the benefit of the employer is included if there is a tax-free Termination/ Severance Payment. This makes the employee liable if in the future HMRC deem that some of the payment paid was taxable. However, all parties should be satisfied through thorough risk assessment that the tax-free payment should not attract tax.
There is typically a warranties clause detailing promises and/or guarantees that the employee is making to the employer, for example that they have not committed any acts of gross misconduct.
The terms and existence of a settlement agreement are often stipulated as being confidential, save expressly for in relation to specific disclosures. However, the clauses must be carefully drafted in order that it is not considered an unlawful non-disclosure agreement. For example, the confidentiality clause should not prevent the employee from, amongst other things, reporting a suspected criminal offence or complying with a court order.
It is common practice for the employer to pay a legal fee contribution to contribute to the costs of the employee’s fees incurred in obtaining independent legal advice in relation to the settlement agreement. The clause will state the value of the legal fee contribution and will state the name of the adviser in order that they can be identified .
The clause in relation to the agreement being “without prejudice” is another typical clause within a settlement agreement. The wording “without prejudice and subject to contract” should also be included within the correspondence between the parties. If a document or correspondence attracts the without prejudice privilege, it cannot be relied upon in open court (i.e. as evidence). Therefore if, for some reason, the negotiations between the parties fail, any without prejudice correspondence (including conversations) cannot be referred to in open courts. If the employer does not follow a “protected” and/or “without prejudice” procedure when offering a settlement agreement, this can expose the employer to claims including for constructive unfair dismissal.
Finally, as it is often stated within the settlement agreement that this agreement constitutes the entire agreement between the parties, it is important to ensure that everything that the employee is entitled to (for example, any bonus or share schemes) is reflected within the document. The employer may also wish to refer to clauses within the contract of employment that will continue to apply (e.g. restrictive covenants).
If you have been presented with a settlement agreement from your employer and you require independent legal advice, or if you would like to offer an employee a settlement agreement, Rollits’ employment team specialises in this area and is available to assist.
Settlement Agreements – FAQs
Will my employment continue?
Settlement agreements are most commonly used in scenarios where employment ends. Your settlement agreement will likely state your “Termination Date”, which will be your final date of employment. Settlement Agreements can be used in these scenarios to reflect the mutually agreed terms upon which your employment will terminate and provide parties with a “clean break”.
Alternatively, settlement agreements can be used in situations where there is a dispute between the employer and employee whilst the employment is ongoing. In such circumstances, employment could continue, however the employee would agree to waive their right to bring certain claims against the employer in respect of that specific dispute under a settlement agreement, usually in return for a sum of money.
Is it a requirement for me to receive legal advice on the settlement agreement?
In order for the settlement agreement to be legally binding, as the employee you are required take independent legal advice on the terms and effect of the agreement and your ability to pursue your rights and claims against the employer. Once you have received legal advice, your adviser will sign the legal adviser’s certificate to confirm that the advice has been provided to you.
Will I receive a tax-free settlement payment?
You may be receiving a tax-free settlement payment under the settlement agreement, although this may depend on what the payment is made in relation to. For example, if you are paid a sum which is solely paid in relation to the termination of your employment as compensation for loss of employment, you may be entitled to receive up to £30,000 tax free. If your employment is to continue, any compensation payment paid may be subject to tax, depending on the type of claims you are being compensated for.
Contrastingly, if you are simply receiving pay in lieu of your notice period or pay in relation to accrued and outstanding holiday pay, this sum will be subject to taxable deductions, including in respect of income tax and national insurance. The wording within the settlement agreement should outline the parties’ understanding as to which monies are taxable and which can be paid tax free.
For legal and tax reasons, your solicitor must ensure that notice is properly accounted for in the settlement agreement (e.g. you work your notice period or are paid in lieu of any expired period of notice (subject to tax and NIC as appropriate). If there are any issues with the notice provided for in the agreement, this may need to be raised with your employer, and it may not be lawful for the agreement to be entered into until it is amended to appropriately deal with notice.
It is common for a tax indemnity to be included within the settlement agreement meaning that if HMRC deem any additional tax is due on the amounts of money you have received, you will be liable to repay your employer for the payment of such tax.
Is the termination payment negotiable?
Your ability to negotiate the termination payment may depend on the circumstances, potentially including your role within the organisation, your seniority, your length of service and, importantly, the reason behind the offer of the settlement agreement.
For example, if you are waiving certain claims which you may otherwise be able to bring against your employer, you may be able to argue you should be entitled to a sum in a similar region to the compensation which you would likely be awarded by an Employment Tribunal if your claim was to be successful. Your solicitor would be able to advise you in relation to whether you may be able to negotiate any payments paid to you and, if so, on what basis.
Can I still bring claims against my employer?
The purpose of a settlement agreement is for the employee to waive any claims they may have against their employer, in return for receiving the benefits and sums offered under the agreement. Therefore, when considering entering into a settlement agreement, you should proceed on the basis that you do not intend to bring any claims against your employer moving forwards. Settlement Agreements often include a long list of claims which you are waiving when entering into the settlement agreement, however this list is not exhaustive.
Can my employer refuse to pay me the monies due under the settlement agreement?
Once a settlement agreement has been correctly completed (i.e. signed by both parties, dated and the legal adviser’s certificate is completed) a settlement agreement is a legally binding document. If your employer refuses to pay the money you are entitled to under the terms of the settlement agreement, you can, therefore, bring a claim against your employer for breach of contract with assistance from your legal representative if required.
Will my employer pay my legal fees?
It is standard practice for employers to pay a legal fee contribution towards your legal costs, for example £500 plus VAT.
Whether the employer’s legal fee contribution will be sufficient to cover your legal fees will depend on the extent of the advice required. For example, if you wish to negotiate some aspects of the proposed settlement agreement, such as any sums offered, your legal fees would be higher than if you were content with the original terms offered and did not wish to negotiate (or if any negotiation had taken place between the parties prior to instructing a solicitor). If the agreement requires amendment for technical and/or legal reasons (e.g. to properly account for notice), fees are likely to be higher. If your legal fees are likely to exceed the legal fee contribution offered, in the first instance you could request an increase in the legal fee contribution from your employer or your solicitor could do this on your behalf.
Will any of my benefits continue?
Entitlements to benefits such as private healthcare, death in service benefit, company car, car allowance, company phone, commission, bonus arrangements and entitlement to participate in any company share scheme, will normally cease on termination of employment including when a settlement agreement is used.
It is common for an “entire agreement” clause to be included within the settlement agreement which states that the parties agree that the settlement agreement constitutes the entire agreement between the parties. If you want to continue to receive any benefit (e.g. a bonus that is due for payment in the future) it is therefore important to explicitly state how these are to be dealt with within the settlement agreement, otherwise they are likely to be lost.
Alternatively, the agreement may state that the benefit will be dealt with in accordance with the terms of the specific scheme, for example, any share scheme or employee incentive scheme with external rules. It is important that you are satisfied that your entitlements to any benefits have been dealt with appropriately within the settlement agreement. You should therefore review the scheme and ask your solicitor about this if you are uncertain.
How long will it take to complete the agreement?
If the settlement agreement is offered as part of a “protected conversation” your employer should provide you with a 10 calendar day period in order to consider the terms of the settlement agreement.
Within this 10 day period you will need to obtain independent legal advice in order to understand the terms and effect of the settlement agreement and outline any points you wish to negotiate with your employer.
The employer may be willing to offer some flexibility in relation to the deadline, particularly if you are in the process of obtaining independent legal advice in order to validly enter into the settlement agreement.
After both parties have confirmed the settlement agreement is in an agreed format, completion of the settlement agreement can happen quickly (i.e. both parties sign and date, and the legal adviser signs and dates the legal adviser’s certificate).
Will amendments be required to the agreement?
It is your decision as to whether you wish to negotiate any amendments to commercial terms of the settlement agreement. For example, you might be happy with the suggested termination payment, or you may feel as though the value offered is inadequate. You may also consider negotiating some potential wording, for example, the wording of a reference which your employer is to provide to a prospective employer.
Additionally, your solicitor may suggest some technical amendments to the settlement agreement for legal reasons.
It is important to try and strike the right balance when negotiating amendments to the settlement offer made by your employer as you could risk the employer refusing to negotiate and potentially retracting the offer of a settlement agreement altogether.
Will I continue to be bound by post-termination restrictions in my contract
Settlement Agreements often state that the post-termination restrictions within a contract of employment continue to apply post-termination.
Restrictive covenants restrict your ability, for a period of time following the termination of your employment with the employer. Post-termination restrictions commonly restrict your ability to:
- Compete against your employer in another business (non-competition);
- Solicit a customer or client from your previous employer; or
- Poach a previous employee from your previous employer to join you in working for the competitor.
It may be reasonable for your employer to require you to remain bound by the restrictive covenants you agreed to within your contract of employment. However, it may be possible to negotiate the removal or amendment of the covenants – much will depend on the circumstances surrounding the offer of the agreement.
You should bear in mind that negotiating the restrictive convents through your legal adviser is likely to incur additional legal fees.
Should I enter into the settlement agreement?
Settlement agreements are voluntary and you should not feel forced or coerced into entering into one. Whether you should enter into the settlement agreement is a personal decision and is entirely dependent on the facts and circumstances of each matter, including your willingness to settle any ongoing matters with your employer and/or whether you are comfortable leaving your employment.
There are some benefits to entering to a settlement agreement, for example, avoiding any legal claim process which can be costly and stressful and potentially receiving a tax-free lump sum compensation payment, however your solicitor can provide assistance in highlighting any potential benefits or pitfalls to entering into the settlement agreement in order to assist you with making your decision.
