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Has your Employer proposed a Settlement Agreement to end your employment – What you need to know.
Settlement agreements (previously known as ‘compromise agreements’ provide a means by which agreement can be reached between an Employer and Employee which is final and binding without using the services of The Advisory, Conciliation and Arbitration Service (Acas). A settlement agreement enables an employee and their employer to settle any employment claims which arise and the requirements for a settlement agreement are set out in employment legislation and certain conditions must be met.
At the outset
The reason for making the settlement offer should be given at an initial meeting between the employer and the employee to discuss the issue(s) of concern to one or both parties. Neither party is required to accept the terms set out in any draft settlement agreement. There can be a process of negotiation during which both parties can make counter offers until a mutually satisfying agreement is reached. If both parties recognise that no agreement is possible or an employee does not accept the offer and any subsequent revised offer, then the individual can choose to reject the settlement agreement terms. It is important for an employee to understand the rights in such circumstances and before proceeding to bring a claim before a tribunal.
A minimum period of ten calendar days should be allowed to consider the proposal and receive independent legal advice, unless the parties agree otherwise. A companion (work colleague, trade union official or trade union representative) should be allowed to attend any meeting regarding ending the employment relationship, although this is not a statutory requirement.
What are the conditions
The law provides that in order for a statutory settlement agreement to be effective, the following conditions must be met. These conditions are the same for each statutory claim to be waived, although the conditions are set out in different statutes depending on the nature of the claim in question.
(1) The agreement must be in writing.
(2) The agreement must relate to the particular proceedings which might be brought by the employee (stating that the agreement is in ‘full and final settlement of all claims’ will not be sufficient to contract out of Employment Tribunal claims).
The agreement is not designed to be a ‘catch all’ agreement preventing the employee from waiving any type of employment claim and indeed is unlikely to be effective if it does. Careful thought must be given in each case to appropriate claims, and the agreement should be tailored to the individual and the potential claims which he or she has asserted, or which are available to him or her.
(3) The employee must have received advice from a relevant independent adviser as to the terms and effect of the proposed agreement and in particular its effect on his or her ability to pursue his or her rights before an employment tribunal.
A relevant independent adviser must be:
- a qualified lawyer, or
- an officer, official, employee or member of an independent trade union who has been certified in writing by the trade union as competent to give advice and is authorised to do so by the trade union, or
- an advice centre worker or volunteer who has been certified in writing by the centre as competent to give advice and is authorised to do so by the centre (provided that the employee has not made a payment in respect of advice).
(4) There must be in force when the adviser gives the advice a contract of insurance or professional indemnity insurance covering the risk of a claim by the employee against the adviser in respect of loss arising in consequence of the advice.
(5) The agreement must identify the adviser.
(6) The agreement must state that the conditions regulating settlement agreements have been met.
It is customary for the agreement to include a certificate provided by the relevant independent adviser (including his name, name of firm/trade union or advice centre, and any reference) stating that the relevant conditions are met. It is important to note that if the relevant conditions are not met the attempted waiver of statutory claims is not effective. This means that the employee would still be free to make statutory claims against the employer.
Other common terms
One of the advantages of a settlement agreement is its flexibility and the fact that it can be tailored to individual circumstances. Other common terms could include the following:
- Pre-departure arrangements.
Consideration should be given to whether the employee will leave immediately (and perhaps receive a payment in lieu of notice (PILON)), work out his/her notice (and if so in what capacity) or possibly be sent on garden leave during the notice period. Any conditions associated with continued employment must be clearly set out for the avoidance of any confusion. There may also be additional provisions, for example in relation to any handover or authority to incur further expenses, and provision for the salary and benefits to be paid during any notice period.
- Pension provision.
Agreement must be reached with the employee as to the ongoing position with his/her pension, although this is often done by reference to a separate statement or letter.
- Continuation of benefits.
The employer may agree in some cases to either compensate the employee for loss of fringe benefits, or to allow the employee to continue to receive those benefits for a certain period after the employment ends.
- Return of company property.
It is usual to provide for the immediate return of property on termination, although in certain circumstances there may be agreement for the employee to retain the property for a set period or even buy it from the company. Any terms and conditions associated with the property must be made clear (for example, if the employee is allowed to keep the mobile telephone for a further three months, the parties should decide who pays the bills),
- Departure announcement/reference.
These issues are often of significant importance to the employee. It is common for the agreed text of to be attached to the agreement.
- Payment of legal fees.
Depending on the circumstances, the employer may agree to pay a certain contribution to the employee’s legal fees in obtaining advice on the agreement (although this is not a legal requirement). Most employees do make a contribution and in most cases, we will accept the employer’s contribution to cover your legal fees.
- Tax indemnity.
If any part of the termination payment is made to the employee tax-free (usually where a payment in lieu of notice is made in certain limited circumstances, or where statutory redundancy pay or an ex-gratia payment is made), it is common for the agreement to include an indemnity from the employee to cover the possibility of HMRC demanding tax or national insurance contributions from the employer. The employee will be liable for claims, liabilities, actions, proceedings, costs (including legal fees), losses, damages, demands, penalties, fines or expenses reasonably suffered or incurred by the organisation arising out of or in connection with the failure of the employee to meet his or her obligations in respect of income tax liability and national insurance or similar contributions, except where such claims arise out of any act or omission of the organisation or its employees. This is justified on the basis that HMRC will usually look to the employer first to satisfy what is in effect the employee’s tax liability. HMRC will only pursue the employee for the underpayment of PAYE, if the employer took reasonable care in the first place and the failure to deduct the correct amount was due to an error made in good faith.
From 6 April 2018, all payments in lieu of notice (both contractual and non-contractual) will be subject to tax and NICs as earnings. If the notice period is not worked, any payment equivalent to an employee’s basic pay will be taxed and subject to Class 1 NICs as employment earnings.
- Confidentiality.
Agreements commonly either restate any existing provision as to confidentiality of information (in a contract of employment) or may introduce a new provision.
- Restrictive covenants.
The agreement may restate restrictive covenants or may introduce new, agreed terms. It is often the case that on termination of employment the parties have a clearer idea of what they want to achieve, and therefore the employer may look sympathetically on reducing the scope of the restrictions. For example, if the employment contract states that the employee may not deal with any of the employer’s customers or clients for a set period following termination of employment, the parties may agree that only specified customers are included within the scope of the clause.
When concluding agreements care should be taken in ensuring the terms are conclusive and all embracing. Where a settlement agreement is signed by both parties, then the contract of employment can be terminated either by giving the required notice or from the date stated in the settlement agreement. Where the parties sign to accept the terms of a settlement agreement, then the employee is unable to bring a claim before an Employment Tribunal about any type of claim listed within the agreement. The details of any payments due to the employee and their timing should be included in the agreement.
Need a Specialist Employment Solicitor?
If you are thinking of signing a settlement agreement (formerly known as compromise agreements) with your employer, it is important that you receive good legal advice on the terms of the agreement and what other legal options may be open to you. As specialist settlement agreement employment solicitors we are highly experienced in advising on settlement agreements and successfully negotiating terms. Call us on 023 9282 0747
This information is for general information purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given. Please contact us for specific advice on your circumstances.
