Please note this guide is for the purpose of information only and is not intended to replace, or to constitute, legal or professional advice. Therefore, this guide should not be relied upon as a substitute for specific legal advice about your particular situation or circumstances and you are deemed to have taken notice of the disclaimer at the end of it.
Be aware that if an employee does not sign a settlement agreement settling their claims, employees only have a short time in which to lodge an Employment Tribunal claim - usually within 3 months of their employment terminating or the problem happening at work. For example, the time limit for lodging an unfair dismissal claim with the Employment Tribunal is 3 calendar months less 1 day from the effective date of termination. Please note that anyone seeking to lodge a claim with the Employment Tribunal must first go through the free ACAS Early Conciliation Scheme.
1. What is a settlement agreement?
A settlement agreement is a contract between an employer and employee dealing with the settlement of claims that the employee may have arising out of their employment or its termination.
In a settlement agreement the employee agrees to give up their rights to bring claims and proceedings against their employer, usually in exchange for a compensation payment and sometimes other benefits, such as an agreed reference.
A settlement agreement is sometimes also called a compromise or severance agreement.
A settlement agreement can be entered into during or after the termination of employment.
2. Is a settlement agreement legally binding?
A settlement agreement is legally binding when signed by both parties, but must comply with the conditions regulating settlement agreements set out in section 203 of the Employment Rights Act 1996 (see below).
3. What conditions regulate settlement agreements?
A settlement agreement:
* Must be in writing;
* Must relate to a particular complaint that the employee may have;
* The employee must receive legal advice before they sign the settlement agreement from a relevant independent adviser e.g. a solicitor about the terms and effect of the settlement agreement and, in particular, its effect, on the employee’s ability to pursue their rights before an Employment Tribunal;
* When the adviser gives the advice they must have a contract of insurance or professional indemnity insurance covering the risk of a claim by the employee for loss arising from the advice;
* It must identify the adviser;
* It must state that the conditions regulating settlement agreements have been met.
4. Who will draw up a settlement agreement?
It is usual for the employer’s solicitors to draft the settlement agreement and therefore will generally have been drafted to protect the employer’s interests. It may be appropriate for the employee or their solicitor to negotiate amendments to the terms or wording of the settlement agreement.
5. Does an employee have to sign a settlement agreement?
An employee does not have to sign a settlement agreement offered by their employer. However, an employer may decline to settle the employee’s claims, unless the employee signs a settlement agreement, as the employer will want the employee to give up their rights to bring claims and proceedings against them.
6. Does an employee have to receive independent legal advice before signing a settlement agreement?
Before an employee signs a settlement agreement they must receive legal advice from a relevant independent adviser e.g. a solicitor about the terms and effect of the settlement agreement and, in particular, its effect, on the employee’s ability to pursue their rights before an Employment Tribunal. This is one of the conditions regulating settlement agreements (see question 3).
7. Can the employer’s solicitors provide independent legal advice to the employee about the terms and effect of entering into a settlement agreement?
The employer’s solicitors cannot provide independent legal advice to their client’s employees about the terms and effect of entering into a settlement agreement, because they act for the employer and therefore are not independent.
8. Who pays the employee’s legal fees for advice about a settlement agreement?
Although it is not obligatory, it is the norm in asettlement agreement for there to be a clause stating that, if the employee signs it, the employer will pay a contribution to the employee’s reasonable legal fees incurred in relation to an independent solicitor advising the employee about the terms and effect of entering into thesettlement agreement up to a stated maximum sum. The maximum sum is often somewhere between £300-£500 plus VAT, but may vary depending e.g. on the length and complexity of the settlement agreement, the seniority of the employee and the employer’s policy on the payment of legal fees. The figure for legal fees is sometimes negotiable e.g. if the wording needs amending.
The usual payment process is that the employer will pay their contribution to these legal fees direct to the employee’s solicitor on receipt of an invoice from the solicitor (addressed to the employee, but marked payable by the employer i.e. in accordance with HMRC requirements).
If an employee instructs me to advise them about the terms and effect of entering into a settlement agreement, it is usual for my fees for that advice to be covered in their entirety by the employer’s contribution, unless the employee decides not to sign it (in which case the employee will pay my fees) or the employee agrees with me in writing and in advance to pay an additional fee.
Employers may not be prepared to pay legal fees incurred in the employee’s solicitor trying to negotiate better financial terms in the settlement agreement for the employee. Therefore, if I am instructed to try to negotiate a better financial package, e.g. an increase in the compensation payment, the employee will need to agree to pay my fees for that work.
9. Are all settlement agreements the same?
The wording of settlement agreement varies depending on the circumstances of the individual case and who has written it. However, it is common for settlement agreements to contain clauses dealing with matters such as:
* The termination date;
* Arrangements prior to termination of employment e.g. garden leave;
* Arrangements on termination;
* Resignation of directorships;
* What payments and benefits the employee will receive, when and by what method;
* The parties understanding of the tax position;
* A tax indemnity by the employee;
* Treatment of unvested shares;
* A contribution to the employee’s legal fees;
* A reference;
* An agreed announcement of departure;
* A waiver of claims by the employee;
* The return of property;
* Confidentiality in relation to the existence, terms and circumstances of the settlement agreement and the negotiations surrounding it;
* Restrictions on the use and disclosure of confidential information;
* An obligation by the parties not to make or publish derogatory comments about each other;
* Post termination restrictions;
* Warranties or promises e.g. by the employee that they have not breached their contract of employment or acted in a way that the employer could have dismissed them without notice;
* Repayment provisions for breach by the employee of the settlement agreement;
* Any third party rights of enforcement;
* The settlement agreement being the entire agreement between the parties;
* Variation of the settlement agreement;
* Jurisdiction of the courts.
10.Can the compensation in a draft settlement agreement be negotiated?
If an employee receives a settlement agreementt, before they decide whether to sign it, they or the employee’s solicitors can try to negotiate the compensation package. Whether or not the employer will be likely to improve their offer depends very much on the circumstances of the individual case and the potential risk to the employer of the matter not being settled.
11. Can the wording of a draft settlement agreement be negotiated?
If an employee receives a settlement agreement, before they decide whether to sign it, they or the employee’s solicitors can ask the employer/the employer’s solicitors to make amendments to it. It is not unusual for there to be a need for amendments, as the wording of settlement agreements will vary depending on the circumstances and generally the employer’s solicitors will have drafted asettlement agreement to protect their client’s interests. Often employers will agree to make some amendments to the wording of settlement agreements, although they may be less willing to do so if they are making mass redundancies.
12. How long will the settlement agreement process take to complete?
If I am instructed by an employee to advise them about the terms and effect of signing a settlement agreementt, this can often be done within a couple of days of my receiving the settlement agreement to review, unless I need to liaise with the employer or their solicitors to negotiate the compensation package or the wording (in which case the process can often be concluded within 5 -10 days).
13. Can the legal advice be given to an employee over the telephone?
I can, and do, advise employees over the telephone about the terms and effect of signing a settlement agreement.
14. Should a settlement agreement detail all payments and benefits an employee will receive?
It is very important that a settlement agreement details all of the payments and benefits an employee will receive and when, as it is usual for settlement agreements to contain a clause stating that the settlement agreement constitutes the entire agreement and understanding between the parties and that the parties have not relied upon any promises or assurances that are not set out in it. In the settlement agreement the employee will also be waiving their right to bring claims or proceedings against the employer.
Therefore, in addition to the payment of any salary and holiday pay accrued due, and the reimbursement of any expenses, the settlement agreement should for example detail such matters as any entitlement to a payment in lieu of notice, commission, bonus, compensation for loss of employment, shares and any property of the employer that is to be retained by the employee.
15. How much compensation should an employee receive in a settlement agreement?
The amount of compensation an employee should receive in a settlement agreement for loss of employment depends very much on the individual circumstances. However, examples of relevant factors include the nature and strength of the employee’s claims, the manner and circumstances of termination, the length of employment, loss of salary and benefits and the employee’s prospects of obtaining new employment.
16. What is the payment period for a compensation payment?
The period for the payment of compensation for loss of employment should be stated in thesettlement agreement and is usually within 7-28 days of the termination date or the receipt (if later) by the employer of the signed settlement agreement and the signed certificate of the employee’s legal adviser.
It is usual for contractual payments, such as outstanding salary and holiday pay, to be paid through the normal pay roll arrangements.
17. Is a compensation payment in a settlement agreement subject tax and National Insurance?
The tax position depends on the nature of the payments in the settlement agreement. However, generally, the first £30,000 of compensation for loss of employment, that is not otherwise taxable, is not subject to tax or employees’ National Insurance Contributions, whilst over that figure compensation is subject to tax, but not employee’s National Insurance contributions.
18. Is a payment in lieu of notice subject to tax and National Insurance?
All payments in lieu of notice (also known as “PILONs”) are subject to tax and National Insurance as from the 6th April 2018.
19. Is holiday pay subject to tax and National Insurance?
When an employee’s employment is terminated they are entitled to a payment in lieu of holiday accrued due, but untaken, calculated up to the termination date of their employment. Holiday pay is subject to tax and National Insurance.
20. What is a tax indemnity in a settlement agreement?
It is usual in a settlement agreement for there to be a clause effectively stating that the employee agrees to indemnify the employer on a continuing basis in respect of any claims by HM Revenue and Customs for income tax or employees’ National Insurance contributions, other than deducted at source, arising from the employee’s receipt of the compensation payment.
21. What is a waiver of claims in a settlement agreement?
By signing a settlement agreement, the employee gives up/waives the right to bring claims or proceedings against the employer, other than in relation to ones expressly excluded from the settlement. The matters commonly excluded are claims by the employee to enforce the terms of the agreement, claims in relation to accrued pension rights and those personal injury claims that cannot be brought in the Employment Tribunal and of which the employee is unaware, and could not reasonably be expected to be aware of, at the time of entering into the settlement agreement.
The waiver of claims against the employer will usually also include the waiver of any claims against any Group Company and their respective officers and employees.
22. Will the employer meet the cost of outplacement training?
This is a matter of negotiation between the parties or their solicitors. If the employer agrees to meet the cost of outplacement training, a clause providing for that needs to be included in the settlement agreement.
23. Is an employee entitled to a reference?
Generally an employee has no legal entitlement to a reference. Therefore, it is common for there to be a clause in settlement agreement stating that the employer will provide a reference to potential employers and recruitment agencies consulted by the employer, on the employer’s letterhead, and for the wording to be set out in a schedule to the settlement agreement so that it is clear what the employer will say.
It is common for references to include only strictly factual information, such as the dates of employment and the employee’s job title, although some employers may be prepared to include additional information e.g. a brief outline of duties.
24. Can a settlement agreement deal with an announcement of the employee’s departure?
It is not unusual for there to be a clause in settlement agreements stating that the announcement of the employee’s departure will be in agreed terms and in an agreed way (in which case the wording of the announcement will generally be set out in a schedule to the settlement agreement).
25. Can an employee disclose to a third party that they have signed a settlement agreement?
It is usual for there to be a clause insettlement agreements stating that the employee cannot disclose the existence or terms of, or circumstances or negotiations leading up to their signing, a settlement agreement to any third party other than those permitted by the wording of the settlement agreement. Often settlement agreements will specify that the employee may disclose such matters in strict confidence to their spouse/partner/civil partner, their solicitors/accountant and to HMRC only. If the employee has any employment related insurance e.g. mortgage protection, and needs to disclose any such information to their insurer for the purpose of claiming upon the policy, then an amendment to the wording may be needed to provide for that.
Sometimes settlement agreements will contain a clause stating that prior to signing it the employee has not already breached these confidentiality provisions.
26. Do settlement agreements contain restrictions about making derogatory comments?
It is usual for there to be a clause in settlement agreements stating that the employee will not make or publish derogatory statements about the employer or its officers and employees or which may lower their reputations.
Such clauses are not always expressed to be mutual and therefore sometimes need amending so that the employer also makes such a commitment to the employee.
27. What if the employer fails to pay the compensation payment?
If the parties have signed the settlement agreement and the employer fails to pay the compensation payment, the employee could take enforcement action in the civil courts for the debt.
Has ACAS (the Advisory, Conciliation and Arbitration Service) produced any code of practice or guidance on settlement agreements?
The ACAS Code of Practice onsettlement agreements is designed to help employers and employees understand the implications of section 111A of the Employment Rights Act 1996 for the negotiation ofsettlement agreements before termination; see the following link www.acas.org.uk/.../Acas-Code-of-Practice-on-Settlement-Agreements. Further information can be found in the ACAS booklet “settlement agreements: A Guide”, see link www.acas.org.uk/.../Settlement_agreements_(the_Acas_Guide)
29. Can Settlement Agreements be proposed by both employees and employers?
Yes, a settlement agreement can be proposed by employees or employers, although it is more common for employers to take this step.
30. How long should an employee be given to consider a proposed settlement agreement?
An employee should be given a reasonable period of time, once they have received the written agreement, to consider it and to obtain independent legal advice about the terms and effect of signing it. The ACAS Code of Practice on settlement agreements specifies a minimum of 10 calendar days, unless the parties agree otherwise. However, that period of 10 calendar days is not mandatory.
31. Is an employee entitled to be accompanied by a colleague or trade union representative at a meeting with their employer to discuss settlement proposals?
No, there is no legal requirement for an employer to allow an employee to be accompanied by a colleague or trade union representative at a meeting with the employer to discuss settlement proposals, although in the ACAS Code and Guide to settlement agreements it states that it is good practice to allow the employee to be accompanied by such a companion. It may also constitute unlawful discrimination to refuse to allow an employee to be accompanied e.g. if a request to allow a companion constitutes a “reasonable adjustment”.
32. What does it mean when a settlement offer is made “without prejudice”?
Briefly, this means that any statements made in the course of a genuine attempt to settle an existing dispute between the parties cannot generally be used as evidence in any court or Employment Tribunal proceedings, as long as there has been no unambiguous impropriety.
33. What is a protected conversation under section 111A of the Employment Rights Act 1996?
Briefly, protected conversation confidentiality means the employer and employee can enter into settlement discussions and negotiations, even when there is no existing dispute between the parties, in the knowledge that those discussions and negotiations cannot be used as evidence in any unfair dismissal claim, as long as there has been no improper behaviour.
A non-exhaustive list of examples of improper behaviour is included in the ACAS Code of Practice on Settlement agreements
In the event an Employment Tribunal finds there has been improper behaviour,settlement agreement discussions and negotiations will only be inadmissible in evidence to the extent that the Employment Tribunal considers it just.
This protected conversation confidentiality does not relate to an automatically unfair reason for dismissal such as whistleblowing, asserting a statutory right or trade union membership.
34. Can an employer withdraw a settlement offer ?
Yes, generally an employer can withdraw a settlement offer at any stage before a binding settlement agreement is signed by the parties.
This guide is for the purpose of information only and is not intended to replace, or to constitute, legal or professional advice. Therefore, this guide should not be relied upon as a substitute for specific legal advice about your particular situation or circumstances.
Melanie Best does not accept any responsibility for any errors, omissions or misleading statements or for any loss which may arise from any reliance on the content of this guide or document.
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Any none e-mail correspondence should be sent to my office address at: Melanie Best Employment Lawyer, 1010 Cambourne Business Park, Cambourne, Cambridge CB23 6DP.