Settlement Agreements

 

settlement agreement

 

What is a settlement agreement UK?

 

A settlement agreement is a deal between an employer and employee that ends a dispute and/or a contract of employment. It means that an employee agrees not to pursue a legal claim against the employer in return for some kind of benefit.

The settlement agreement (also known as a compromise agreement) is a legally binding contract that settles is a full and final settlement of a dispute so that an employment tribunal, on seeing the agreement, would not accept a claim about the dispute by the employee or employer. With or without the support of an employment lawyer, this means the employee cannot lodge an employment tribunal claim for unfair dismissal, constructive dismissal, breach of contract or anything else. The settlement agreement should also resolve a specific dispute or complaint between employer and employee. It has to fit the relevant facts so there is no one-size-fits-all deal that can be taken off the shelf.

Who can advise on a settlement agreement?

A valid settlement agreement adheres to good employment law advice, can be accepted by an employment tribunal and where the employee has received independent legal advice.

It is important that the employee receives employment law advice from a specialist employment law solicitor. An employment tribunal does not require the employer to have legal advice, but an employment law solicitor would strongly recommend specialist advice for the employer.

How do I get a settlement agreement?

In the last few years, ‘protected conversations’ were introduced so that an employer and employee can start discussions without there being a dispute. But this agreement is not the same as the typical agreement. Protected conversations only relate to typical unfair dismissal claims. They cannot be used to address dismissals that are automatically unfair, such as those involving health and safety, or whistleblowing.

An employer cannot expect conversations to be protected if they engage in ‘inappropriate conduct’ or improper behaviour as part of the drawing up of the agreement. The employer cannot tell the employee to accept the agreement or else they will need to resign or be dismissed. If so, an employee can go to an employment tribunal and claim constructive dismissal.

Why would an employer offer a settlement agreement?

Settlement agreements mean an employer can avoid the publicity, costs or the uncertainty of an employment tribunal.

Larger employers such as banks may offer settlement agreements on a routine basis when there is no employment dispute. In such cases, it does not mean that the employer fears legal action in an employment tribunal. Instead, the employer could use the settlement agreement to prevent an employee from raising issues after the end of the employment contract.

The settlement agreement sets out the full terms between the parties. It can be used to avoid costly and time-consuming performance, disciplinary or redundancy procedures. It will mean that the employee will receive compensation for losing their job without having to take legal action at an employment tribunal. This could include a tax-free sum, redundancy, holiday, bonus, other sums and a job reference.

It is important that the employee receives employment law advice from a specialist employment law solicitor. An employment tribunal does not require the employer to have legal advice, but an employment law solicitor would strongly recommend specialist advice for the employer.

What must be in a settlement agreement?

A settlement agreement must have conditions that need to be met for it to be legally binding. These conditions are that the:

– agreement must be in writing

– agreement must relate to a particular dispute or complaint

– employee must have received independent, employment law advice, or advice from a certified and authorised member of a trade union

– an independent adviser must have insurance or professional indemnity to cover any claim against the advice given

– agreement must identify the adviser

– agreement must state that the employment law and other applicable statutory conditions regulating the settlement agreement have been met.

What is a good settlement agreement?

The Advisory, Conciliation and Arbitration Service (Acas) has produced a Code of Practice on Settlement Agreements. This sets out how settlement agreements should operate and also provides best practice on how negotiations should take place. The Code is not legally binding but is recognised by employment tribunals and employers will need to explain to a tribunal why they did not follow it.

What financial payments are included?

employment law wages

A settlement agreement would usually include:

– contractual payments up until the last working day of employment

– payment in lieu of notice

– a separate termination payment, including an ex-gratia payment

– arrangements regarding bonus payments / share schemes/ long-term incentive plans (LTIPs)

– sums covering new clauses of confidentiality and/or post-termination restrictions, and

– all other statutory/contractual claims that might arise in an employment context.

What non-financial terms can be included?

Typically, non-financial terms include: – an agreed reference – a clause that keeps the terms of the agreement confidential – an agreement to not disparage the employer and employee – garden leave – keeping company property like a car or phone – keeping company-funded schemes like private health insurance.

What’s an average settlement agreement pay-out?

The average settlement agreement pay-out is approximately three to six-months salary plus the notice pay (if notice is not served) and outstanding holidays. Anything above that is a good settlement for the employee and anything below that should be resisted.

Are there minimum pay-outs?

There is no prescribed minimum pay-out. However, employees have a statutory right to be paid their outstanding holidays and notice pay, if notice is not served out. Of course, if the sum offered in compensation payment is woefully short of what an employee could recover, if they litigated for any of the claims being compromised, then the settlement agreement should be rejected if the offer is not improved.

Are there maximum compensation limits?

There is no maximum and no minimum compensation that is prescribed by law. As a guide, an employee should seek to settle for between three- and six-months salary.

What are the settlement agreement legal costs?

It is usual for the employer to agree to pay at least a proportion of the legal fees for an independent legal adviser for the employee.

When to make the settlement offer?

An offer of a settlement agreement should be made by an employer just before a dismissal process is started. Ideally, the employer does not want to expend resources undertaking a fair dismissal process and then pay off the employee at the end. The time and effort should be averted by the offer a settlement agreement before the process begins. It should be one or the other, a fair dismissal process or a settlement agreement.

How is a settlement agreement signed?

A settlement agreement is executed by the employee signing at the end and the employee’s solicitor confirming that he/she has advised the employee by also signing the advisor’s certificate.

What happens if I don’t accept a settlement agreement?

If a deal cannot be made, an employment solicitor, or an employee, cannot use, as evidence in an employment tribunal, discussions that takes place to bring about the settlement agreement. Documents, letters and emails connected to these discussions will be labelled ‘without prejudice’. The discussions will be led by an employment law solicitor on behalf of the employee and cannot be used in any court of law. This allows for frank discussion to take place between employer and employee in order to produce a settlement agreement.

Documents related to the drawing up a settlement agreement may contain the words ‘Subject to contract’. This means that the agreement is not legally binding unless and until there is agreement on the final wording and there is an agreed signed contract. This stops either party saying that there is a binding agreement before the finalisation of the settlement agreement.

In the last few years, ‘protected conversations’ were introduced so that an employer and employee can start discussions about settlement discussions without there being a dispute. But this agreement is not the same as the typical agreement. Protected conversations only relate to typical unfair dismissal claims. They cannot be used to address dismissals that are automatically unfair, such as those involving health and safety, discrimination or whistleblowing.

When does a settlement agreement become binding?

An agreement becomes legally binding when both parties read, sign and date the written document. The employee and the independent legal advisor would first sign the settlement agreement. The employer should then sign the agreement.

When is a settlement agreement valid?

An agreement becomes legally binding when both parties read, sign and date the written document.

Do you pay tax on a settlement agreement?

employment law damages theft employees

The taxation of payments resulting from a settlement agreement can be complex. Payments can be categorised differently and so be subject to different tax rules. So, where payments are a compensation and are £30,000 or less, they are free of income tax and National Insurance (NI) payment.

What different employment rights do employees have?

Employees have a vast range of employment rights, some of which are acquired after a period of service, e.g. unfair dismissal rights acquired after two years of service. Other rights include the right not to suffer discrimination and the right not to suffer deductions from wages that an employee has not authorised.

Can the employee’s employment rights be waived in the settlement agreement?

The whole purpose of a settlement agreement is for the employee to waive their employment rights in return for money from the employer.

Can settlement agreements be used for long-term sickness absence?

If an employee is absent because of ill health, a settlement agreement can be arrived at to bring the employee’s employment to an end with a payoff.

Can settlement agreements resolve a disciplinary dispute?

An offer of a settlement agreement can be made by an employer or employee just before a dismissal process is started. From the employer’s point of view he or she does not want to expend resources undertaking a fair dismissal process as a settlement agreement would allow the opportunity to simply pay off the employee. From the employee’s point of view, a settlement agreement brings the matter to a close expeditiously.

Can settlement agreements resolve a performance problem?

An offer of a settlement agreement can be made by an employer or employee just before a performance process is started. From the employer’s point of view he or se does not want to expend resources undertaking a fair dismissal because of poor performance where a settlement agreement would allow the opportunity to simply pay off the employee. From the employee’s point of view, a settlement agreement brings the matter to a close expeditiously.

Can a settlement agreements resolve a grievance dispute?

Often employers offer employees a settlement agreement to bring their employment to an end where employees have lodged a grievance. A settlement agreement then usually leads to the termination of employment with a payoff to the employee.

Is a settlement agreement the same as redundancy?

A redundancy process is one of the lawful ways to dismiss an employee who enjoys the right not to be unfairly dismissed. A settlement agreement is an alternative way to bring employment to an end by mutual agreement.

Can a settlement agreement be used instead of redundancy?

An offer of a settlement agreement can be made by an employer or employee just before a redundancy process is started. From the employer’s point of view he does not want to expend resources undertaking a fair redundancy procedure where a settlement agreement would allow him the opportunity to simply pay off the employee. From the employee’s point of view, a settlement agreement brings the matter to a close expeditiously.

Case study: settlement agreement disputes

It is possible for some settlement agreements to end up with an unfair dismissal or constructive dismissal claim. Some of these can occur due to disputes over ‘without prejudice’ discussions and ‘protected conversations’.

An example was a case involving technical architect, Mr Basra, and his employer Bjss Ltd. Mr Basra began negotiations with his employer in 2016 to avoid a performance procedure. To Bjss’ proposal, Mr Basra responded in an email stating: ‘I accept BJSS’s 3-month offer subject to contract and without prejudice; today will be the last day at BJSS’.

Mr Basra then signed off sick. Bjss wrote to him, terminated his employment and stated that this was mutually agreed. Basra made a claim of unfair dismissal based on the argument that he had not resigned.

The employment tribunal looked at the email but not any other correspondence. They concluded he had resigned at a particular date. The Employment Appeal Tribunal sought to define when the resignation occurred and therefore concluded that negotiations after the resignation could be looked at by a court.

The appeal decision means that an employee claiming constructive dismissal after settlement negotiations cannot use in a court matters discussed during the negotiations that led to a resignation.

Can the agreement be broken?

Either party can make a claim at a county court if the other has breached the agreement.

If a settlement is reached during a tribunal hearing, the tribunal can put a hold on the claim for a period of time. This claim can then be revived if the other party does not fulfil their part of the agreement within that time.