Our specialist Employment team often see clients who are distressed and daunted by being offered a Settlement Agreement by their employer. Settlement Agreements are actually much more common than people realise, and they can have positive benefits for both employees and employers.
In fact, they can even help to facilitate an employee’s exit, particularly if the employee is actually looking for a way to leave their employment. At the very least they provide a starting point for the commencement of negotiations.
What is a Settlement Agreement?
A Settlement Agreement is a document which sets out an arrangement where an employee (or former employee) surrenders any claims they might have against their employer in return for a compensation payment. Settlement Agreements are usually used where employment has ended or is coming to an end, but it is also possible to enter into a Settlement Agreement where employment is continuing.
Statutory requirements for a Settlement Agreement
Section 203(3) of the Employment Rights Act 1996 states that for a Settlement Agreement to be valid, certain conditions must be met. The conditions are:
- the agreement must be in writing;
- the agreement must relate to a “particular complaint” or “particular proceedings” – each agreement should be tailored to the particular circumstances, so the particular or potential claims should be specifically identified in the agreement;
- the employee must have received legal advice from a Relevant Independent Adviser (“RIA”) on the terms and its effect on the employee’s ability to pursue any rights before an employment tribunal – this includes qualified lawyers, certified trade union representatives and specific worker/employees at advice centres;
- the RIA must have a current contract of insurance, or professional indemnity insurance, covering the risk of a claim against them by the employee in respect of the advice;
- the agreement must identify the RIA;
- the agreement must state that the conditions regulating settlement agreements have been satisfied – many statutory claims may be settled by a Settlement Agreement, but to enable the parties to contract out of them, the agreement must contain a clause which states that it has satisfied the (contracting-out) requirements of the relevant act.
A compensation payment should not be something which the employee is already contractually entitled to. The amount of the compensation payment is a matter for negotiation between the employer and employee. The Relevant Independent Adviser will not advise whether the payment being made is a ‘good deal’ for the employee, but will assess what (if any) claims the employee may be giving up by entering into the agreement and the possible compensation that they may otherwise be entitled to if they pursued a claim rather than entering into the Settlement Agreement.
An employee is only entitled to notice or a payment in lieu of notice if the employer is terminating their employment. Therefore in cases where the termination is by mutual consent, notice or a payment in lieu is unlikely to be due.
Employees should be paid as usual up until the termination date, as well as receiving a payment in lieu of any accrued but untaken holiday on a pro-rated basis.
Compensation payments under £30,000 are tax free, but tax is only payable on the amount which exceeds £30,000 in relation to payments above this amount. A Settlement Agreement may include an indemnity from the employee for any tax liability which might arise, regardless of the amount.
Pay up to the termination date, payments in lieu of accrued but untaken holiday and payments in lieu of notice are generally paid net of tax and national insurance.
It is usual for a Settlement Agreement to include a requirement for the employee to keep the existence and terms of the agreement confidential. If there is a mutual confidentiality obligation upon the employer, no additional ‘consideration’ will be required.
If the obligation regarding confidentiality of the existence and terms of the agreement only apply to the employee and/or any other confidentiality provisions go beyond those contained within the contract of employment, then fresh ‘consideration’ is necessary (usually a further taxable payment).
So what next? As you have to take legal advice for the agreement to be binding, the first step for an employee after being offered a Settlement Agreement is to seek professional advice. It will save you time and money if you attend your first meeting with a professional advisor with a draft agreement from your employer, so be sure to ask for this early on. In most cases, your employer will make a contribution towards your legal costs, but the contribution is often limited and may not cover the costs of any negotiations required.