ALL YOU NEED TO KNOW ABOUT SETTLEMENT AGREEMENTS
What is a settlement agreement?
It is a contract between an employer and employee verified by a legal advisor and prevents an employee from making complaints to the Employment Tribunal about breach of his or her statutory rights or contractual rights. This includes, although it is not limited to claims for unfair dismissal, redundancy, unlawful discrimination and non-payment of salary against their employer, associated companies and employees.
Why a settlement agreement?
The purpose of a settlement agreement is to provide certainty for both parties. As an employee, you waive your ability to bring claims in return for a payment and or other agreed benefit.
Claims that cannot be waived by a settlement
• If your employer breaches the agreement, e.g. does not pay you the termination payment, you could make a breach of contract claim
• Claims in respect of unknown personal injuries at the time of signing the agreement
• Claims in respect of accrued pension rights
I am happy to sign the Settlement Agreement so why do I have to take independent legal advice?
It is a legal requirement, included in Acts of Parliament, that for the Settlement Agreement to be legally enforceable, an individual must take independent advice. This requirement is to mitigate the risk of employers putting pressure on employees to waive certain claims by signing an agreement.
Often if a settlement agreement is signed before termination date a second settlement agreement may be required relating to the period up to the termination date to ‘reaffirm’ the first settlement agreement.
Other legal requirements
Settlement agreements are regulated closely by legislation. For a settlement agreement to be valid, the other conditions that must be met are:
• It must be in writing
• It must relate to a ‘particular complaint’ or ‘particular proceedings’
• An independent adviser 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
• It must identify the adviser
• It must state that the conditions regulating settlement agreements have been satisfied
Negotiating the terms of the agreement
Save for those clauses which relate to the statutory requirements, the contents of a settlement agreement are largely at the discretion of the parties involved and can often be negotiated.
You may wish to consider, and consult us as to the merit of, negotiating:
• The timing and reason for termination recorded in the agreement
• The value of the exit package being offered having regard to salary, the value of any potential claims and any contractual provision for bonuses or deferred awards
• An agreed reference
• An agreed internal and external announcement
• A waiver of restrictive covenants in the employment contract
What information / documents do I need to provide you with?
So that we can advise you properly we need to see the following documents.
• Your contract of employment.
• The Settlement Agreement.
• All correspondence / documents relating to the Settlement Agreement (so this can be redundancy papers or disciplinary papers, emails sending you the Settlement Agreement and so on).
• Policies / procedures that are relevant (so a disciplinary procedure or redundancy procedure, for example).
• Relevant copies of policies or procedures.
Tax free sums
• The first £30,000 of a termination payment for loss of office is generally exempt from tax and national insurance contributions;
• Compensation for losses or injury to feelings resulting from discrimination during employment can also be paid tax free in certain circumstances as long as they can be justified;
• Payments towards legal costs (including VAT) relating to the termination of employment;
• Payments made directly into a pension.
• Salary including bonus and commission payments;
• Holiday pay;
• Payments in lieu of notice (irrespective of a PILON clause in your contract).
As of April 2019, employers now have to pay NICs on any part of a termination payment that exceeds the £30,000 threshold as well as income tax.
What will your advice cost?
Your Employer usually contributes towards the legal costs of you receiving legal advice in relation to a Settlement Agreement. The contribution is usually between £300 and 750 plus VAT and this is usually sufficient for the advice required unless you require extensive negotiations.
Please be aware that an employer usually only pays the legal costs if an employee signs the Settlement Agreement. If you decide not to sign it or if the legal costs incurred are more than your employer is prepared to pay, then you will be responsible for any shortfall your employer does not cover.
If you have received a settlement agreement and require advice, please contact Kaajal Nathwani on 020 8 363 4444 or firstname.lastname@example.org for:
• Plain and simple advice by telephone or email
• Guaranteed same day service
• Fixed fee cost (paid for by your employer)