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What is a Settlement Agreement?
A Settlement Agreement is a legal document usually offered to an employee by their employer which has the effect of terminating their employment.
The terms of the Settlement Agreement must be agreed between both the employee and the employer.
A Settlement Agreement typically provides for payment of salary and other contractual benefits up to the termination date, as well as payment in lieu of notice and payment for accrued but untaken holidays. Private health insurance and bonuses or commission may also be payable, if they are contractual.
It is usual for the settlement agreement to include a severance or compensation payment in addition to contractual benefits. This is sometimes referred to as a termination payment and is paid in consideration of the employee agreeing to enter into a Settlement Agreement.
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What is a reasonable Settlement Agreement?
This very much depends on the individual facts of the case, for example your length of service, your salary and, in particular, the circumstances leading up to the decision to offer a Settlement Agreement.
Usually an employer will offer two to three months gross salary as a termination payment., however this is not always the case and whether an increase can be achieved will depend also on your employer’s willingness to engage in negotiations.
If you wish to seek an increase you should think carefully about what can realistically be achieved. Having unrealistic expectations provides no incentive for an employer to negotiate and ultimately they can withdraw the Settlement Agreement at any time up until it is signed and dated by both parties.
Your employer is likely to have carried out their own assessment on the merits of the case and if they feel that they are at risk they may be amenable to increasing the offer.
Conversely, if your employer believes that they are in a strong position and that the offer is reasonable they are unlikely to increase it.
However, even if your employer says that the Settlement Agreement is non-negotiable it may be possible to negotiate other benefits, such as allowing you to retain a company mobile phone, laptop or a company car for a period of time.
We will be able to advise on the best strategy for you once we have seen the Settlement Agreement and discussed your circumstances.
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Should I accept a Settlement Agreement?
A Settlement Agreement can be a quick and effective way of bringing your employment to an end. It provides certainty and closure to the parties and enables both to draw a line and move on.
The main reason why an employer will offer a Settlement Agreement is to prevent you from bringing any claims against them. It is therefore important to discuss the circumstances leading up to the Settlement Agreement with us so that we can advise you of your options. Whether you then decide to sign the Settlement Agreement or not is entirely your decision.
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Why would an employer offer a Settlement Agreement?
Redundancy
An employer may offer a Settlement Agreement as a means of avoiding a lengthy consultation process.
In redundancy situations your employer is likely to offer contractual benefits and a redundancy payment (the latter of which can be paid gross – ie free of tax – up to £30,000.00). Some employers will pay the Statutory Redundancy Payment to which you are legally entitled, others may make an enhanced Redundancy Payment.
Grievances
If you have submitted a grievance to your employer, perhaps because of unfair treatment, your employer may wish to reach a resolution by offering a Settlement Agreement, rather than risk you taking them to an Employment Tribunal.
Misconduct/Sickness Absence
In cases of alleged misconduct a Settlement Agreement is sometimes used to bring the employment to an end, rather than going through a lengthy disciplinary process.
Similarly, capability dismissals can arise as a consequence of being on long term sick or because of alleged performance issues.
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Can your employer threaten to dismiss you if you do not accept the Settlement Agreement?
Accepting a Settlement Agreement is voluntary and your employer cannot force you to sign one.
They may inform you of your other options if you decide not to sign it, but signing a Settlement Agreement is not compulsory. Your employer may tell you that if you do not sign the Settlement Agreement you must return to work and perhaps go through the normal processes, such as redundancy, capability or disciplinary procedures, which may involve dismissal. However, the alternatives are unlikely to provide you with the same benefits as a Settlement Agreement, such as a compensation payment or enhanced redundancy pay.
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Can an employee suggest a Settlement Agreement to their employer?
The short answer is yes, although it is usually the employer who will suggest a Settlement Agreement and it is their solicitor who will draw it up.
If you wish to do so we would recommend that you take legal advice before asking your employer for a ‘without prejudice’ meeting.
If your employer is agreeable in principle to a Settlement Agreement they will probably ask what terms you are looking for, so it is a good idea to give some thought to this beforehand and discuss it with a solicitor.
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Is a Settlement Agreement Taxable?
In a Settlement Agreement, payments are essentially broken down into two parts. One is for contractual payments, such as salary, holiday pay and any pay in lieu of notice (PILON).
These will be taxed and have national insurance deductions made as normal.
The second type of payment is a termination payment. These are sometime called compensation payments. They are paid free from tax up to a figure of £30,000.00. Included in the tax-free element will be a redundancy payment, if applicable.
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How is a Settlement Agreements different to a Compromise Agreement?
It isn’t. The name was changed from Compromise Agreements to Settlement Agreements on 29 July 2013.
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Can you refer to a Settlement Agreement being offered to you if you reject the offer?
Generally, no, as the Settlement Agreement will be marked ‘Without Prejudice.’
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What does Without Prejudice mean in a Settlement Agreement?
An employer will sometimes offer a Settlement Agreement following Without Prejudice discussions. A Settlement Agreement will include the phrase ‘Without Prejudice’ within it.
This means that you cannot produce the Settlement Agreement as evidence in a Court or Tribunal as a Judge is not allowed to look at Without Prejudice documents. However, once the Settlement Agreement is signed and dated by both parties it then becomes legally binding and, although a confidential document, can be produced in evidence should you need to rely upon it.
Although there are occasions when without prejudice discussions can be relied upon in evidence these are limited.
- In order for discussions to be labelled ‘without prejudice’ there must be an ‘existing dispute’ and a genuine attempt to settle that dispute;
- There must be no ‘unambiguous impropriety’ such as threats or intimidation.
The principle of without prejudice exists in all types of legal matters, not just in respect of Settlement Agreements. and you should take legal advice if you are unsure as to whether you can rely on pre-settlement discussions.
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What are Protected Conversations?
A protected conversation is an ‘off the record’ discussion with your employer. S111A of the Employment Rights Act 1996 states that evidence of pre-termination discussions with your employer cannot later be relied upon in Court or in the Employment Tribunal.
Protected Conversations are similar to Without Prejudice discussions but apply only to Unfair Dismissal claims. They do not apply to discrimination claims or automatic unfair dismissal claims or if there has been ‘improper behaviour.’
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What does a Settlement Agreement cover?
As well as a clause in which you are waiving your right to bring certain claims against your employer, the Settlement Agreement will include:-
- The termination date
- Details of payments to be made to you
- A clause setting out a list of claims that you are agreeing not to bring against your employer (there will be a small number of exceptions)
- Confidentiality clauses
- A clause dealing with the return of company property.
- Restrictive Covenants are common in Settlement Agreements and often repeat what is already in your contract of employment.
- Announcement – this is an agreed communication to your colleagues stating the reason for leaving.
- A Reference. If a Reference is not included an employer is not legally obliged to provide one. It is therefore important that this is included in the Settlement Agreement if you are looking for another job.
Sometimes, there may a clause in the Settlement Agreement asking you to confirm that you have not been offered another job. The wording of Settlement Agreements can be complex and lengthy and this is a clause that is often overlooked. You should not sign the Settlement Agreement unless and until you have taken legal advice and you fully understand the consequences. Indeed it will not be legally binding on either party unless you take legal advice.
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What does a solicitor do with a Settlement Agreement?
They will review a Settlement Agreement and advise on its terms before signing the adviser’s certificate.
Specifically, we will:-
- Review the terms of the Settlement Agreement
- Discuss with you the circumstances leading up to the Settlement Agreement – this can be over the telephone or in person
- Check that you fully understand and agree to the term set out in the Settlement Agreement
- Answer any queries you may have
- Negotiate with your employer, if required
- Advise on the terms and effect that signing the Settlement Agreement will have on your right(s) to bring a claim in the Employment Tribunal or the Court.
- Sign the Adviser’s Certificate
- Forward the signed Settlement Agreement to your employer together with our invoice.
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Why do you need a solicitor for a Settlement Agreement?
In order for a Settlement Agreement to be legal valid the law states that you must have received independent advice on their terms and effect and in particular advice on your ability to bring a claim against your employer in the Employment Tribunal or the Court. This is referred to as the ‘Statutory Advice’ and it is only ‘a relevant independent adviser’ as set out in the Employment Rights Act 1996 who is qualified to provide this advice.
How much do solicitors charge for Settlement Agreements?
Costs vary very substantially between solicitors – anything between £350.00 to £1,500.00 + VAT is not uncommon.
Our costs, in most cases will be between £350.00 – £500.00 + VAT where the terms have already been agreed. The Court’s judicial guidance suggests £500.00 + VAT is an appropriate fee for statutory advice on Settlement Agreements. Most employers are happy to cover this cost so that there is nothing for you to pay.
However, some employers will offer only a contribution towards your legal fees which may be less. We will be able to provide you with a firm quote once we have had sight of the Settlement Agreement and can estimate how much work will be involved.
Occasionally, costs can exceed these amounts if additional work is required, eg advice on restrictive covenants or your employer has requested that you sign the Settlement Agreement on two separate occasions. Sometimes, it may be necessary for us to review additional documentation, such as your contract of employment if you are concerned about any terms which are contained in your contract which may affect your decision to enter into a Settlement Agreement.
In that case we will always advise you of costs upfront and seek your employer’s agreement to increase their contribution to your costs.
If the amount of compensation your employer has offered is insufficient you may wish us to enter into negotiations to seek an increase. In this case we will provide you with a fixed fee quote and can offer you the option of deferred payment of fees, if required. We may also be able to offer a ‘no increase – no fee’ agreement.
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When will I receive my Settlement Agreement money?
The Settlement Agreement will usually have a clause that provides for payment within 14 – 28 of the Termination Date or the date the employer receives a signed copy of the Settlement Agreement, whichever is later.
