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The solicitors in our employment law team are specialist in compromise agreements. We are able to provide fast and comprehensive advice to employers.
What is a Settlement Agreement?
A settlement agreement is a legally binding document between an employer and employee where the employer is offering the employee a financial settlement in exchange of the employee waiving his/her contractual, statutory and civil rights against the employer. Usually the main terms are agreed in principle between them, to avoid any potential disputes which otherwise would give rise to claims in the Employment Tribunal or Civil Courts.
The agreement will have obligations and undertakings for both sides, and usually the terms are to remain confidential between the parties. The employer will also seek the return of all its properties by a specific time, and require the employee not to bad mouth the employer once he/she has left its employment. There are usually other conditions attached after the employment has ended in the form of various restrictive covenants to prevent poaching of staff or clients or restrictions on working with a competitor.
The employee is required to take independent legal advice, generally from a Solicitor, or other legal advisor, such as a suitably recognised trade union official, in order to obtain advice and assistance on the terms and effect of the settlement agreement. The agreement will be marked ‘without prejudice’, and subject to contract in relation to the contents of the settlement agreement before it is signed and endorsed. The legal advisors must have professional legal indemnity insurance.
Terms of the Settlement Agreement
The Settlement Agreement is in “full and final” settlement of all claims against the employer or the employee. Effectively this will be a ‘drop hands’ agreement where both sides walk away with the certainty that there will be no further legal proceedings against either party, unless there is a breach in enforcing the terms of the settlement agreement itself. Some of the terms which are generally present are:
- The settlement figure – which will represent a payment for “compensation for loss of office”, paid by the employer to the employee. This is often regarded akin to damages for a breach of the contract of employment. If the payment is under £30,000, it can be made free of Income Tax or National Insurance deductions. The sum usually represents a figure which is better than the contractual or statutory payment that the employee would otherwise receive, even if he/she took a claim to the employment tribunal or civil court. In disputes where employment has not been terminated, it will compensate for the “wrongdoings” of the employer or offer a way out for an employee facing disciplinary action.
- Termination date and notice – if the Effective Date of Termination (EDT) of the contract of employment is subsequent to the agreement, the employment will normally receive a final salary payment to include unused holiday, and all benefits and payment in lieu of notice, these are normally taxable and NI deductions are made in the usual way.
- A confidentiality clause – which will restrict both parties divulging company details or the terms and circumstances of the compromise agreement to a third party, except to immediate family members or the parties’ legal advisers or where there is a legal duty to do so.
- Taxation – the first £30,000 of the payment if treated as compensation for loss of office can normally be treated as tax free but there might be monies for unused holidays, which is subject to taxation. Employees would normally be asked to give an indemnity to the employer that it will be his/her responsibility to deal with any tax queries or liabilities with the Inland Revenue if there is an issue. The employee will be liable for any taxation over the £30,000 threshold.
- Waiver of contractual and statutory claims – which prevents the parties from pursuing any further legal proceedings in relation to certain claims. The only two potential claims that cannot be waived are personal injury claims which are unknown at the time and accrued pensions rights which will only come to light after the employee has left.
- Restrictive Covenants – which prevent the employee from poaching or enticing the employer’s staff, clients or customers, and prevents him/her from soliciting for business with clients or customers or from working for a competitor for a limited period after termination of employment.
- Legal costs – employers will normally make a contribution towards the legal costs of taking legal advice, with a cap of the fees limited to a maximum of between £250 to £750 plus VAT. If extensive negotiations are required the employee will have to pay the additional costs direct to the solicitor.
More elaborate agreements may include details such as detailed obligations of the parties, shares options, stocks, directorship agreements, third party rights, applicable jurisdiction.
Why use a settlement agreement
The settlement agreement is “drop-hands” agreement and offers certainty to both sides involved. Employers usually rely on them to prevent any further complaints in redundancy situations or where the procedure used to terminate the employment is questionable or where there is a risk of a discrimination claim. Employees, on the other hand, can negotiate better financial and non-monetary benefits and terms at the time of signing without having to issue claims and these result in reducing their legal costs.
Settlement Agreements are also practical as they allow a certain degree of flexibility which would not be possible as a remedy following a hearing, by allowing parties to reach any reasonable settlement, including extensions of company benefits after termination or providing an agreed reference, for instance.
For further information and for advice on employment law issues in London and Nationally, please contact:
Marina Vincent on 020 8422 5678