What is a Settlement Agreement?
A settlement agreement is a legally binding agreement made between an individual and their former employer. Usually, these agreements will be reached after the employer has agreed to pay the employee a sum of money on the understanding that no legal proceedings will be forthcoming. Sometimes these agreements are referred to as redundancy or severance agreements and were previously known as compromise agreements.
When Will a Settlement Agreement Be Used?
Settlement agreements are usually drawn up once negotiations have concluded following an employment dispute. They are also commonly used when an employee has agreed to an enhanced redundancy package, that is a redundancy package. Depending on the nature of the specific settlement agreement, there may be types of claims listed that the employee will be prevented from bringing.
Is a Settlement Agreement Legally Binding?
Yes, a settlement agreement will be legally binding, provided that specific requirements are met. Firstly, an employee who has signed a settlement agreement must have received independent legal advice before doing so. As part of this advice, the solicitor must ensure that the employee has been informed of any potential claim they may have in the future so that they are fully aware of the legal issues that are at stake. The employee must also be made aware of the value of any possible claim. Employees should seek advice from an experienced employment lawyer at the earliest stage to ensure their position is protected during the negotiation stage of any settlement agreement.
The other requirements for a legally binding agreement are that the agreement:
- Is in writing
- Is signed by the employee
- Relates to a specific proceeding or complaint
- Identifies the employee’s legal advisor and that their advisor is insured
- States that the requirements regulating a settlement have been satisfied
Negotiation and Useful Tips on Setttlement Agreements:
A common question is: can we negotiate more money?
In a lot of cases, yes we can.
From straightforward, pre-agreed settlements to more complex arrangements that incorporate share options and structured payments, we can advise on all aspects of your settlement agreement.
We have experience as to what is a realistic sum to make an opening offer with. Whilst you do not want to undersell your case, the whole point of agreeing a potential sum of money to compromise any claims is that it should be of interest to both parties. Therefore it is also important to be realistic as well as bullish during negotiations.
Generally, it is not a good idea to resign whilst negotiating. Please speak to one of our solicitors if you are thinking of resigning.
Deadline to Sign a Settlement Agreement
Often an employer will give a strict deadline for you to agree and sign the Settlement Agreement, often at short notice. However this deadline is often negotiable and if your employer has gone to the lengths of preparing a draft Settlement Agreement in the first place then it is a good idea to explain that you need a reasonable amount of time to consider it and seek legal advice.
You may wish to issue a grievance or may have already issued one.
When negotiating a Settlement Agreement it is often necessary to mark all correspondence “Without Prejudice”.
Even though you may be negotiating with your employer, you must always be mindful of the time limits that still apply to any potential Tribunal claim. It is therefore advisable to complete an ACAS form prior to the time limit expiring.
Tax on Settlement Agreements
There is now the need to use an OT tax code in relation to ex-gratia payments that are greater than £30,000. .
Since April 2018 payment in lieu of notice (PILON) is subject to tax and National Insurance deductions. A Settlement Agreement should state the correct amount of notice.
Compensatory payments for loss of office are generally tax-free (up to £30,000).
For settlement payments in excess of £30,000 the OT tax code has to be used and the applicable rate applied – 20% and then 45% on any sum in excess of the £30,000.
Discrimination and Injury to Feelings
Compensation apportioned to injury to feelings is tax-free.
As long as the redundancy payment is less than £30,000, whether this has been calculated in accordance with statutory amount (please see link to redundancy money reckoner) or whether there is an enhanced contractual right, redundancy payments are tax-free.
Generally, your employer will agree to fund the advice needed to negotiate and sign a Settlement Agreement on your behalf.
What are the Benefits of Signing a Settlement Agreement?
Employees who sign a settlement agreement can receive up to £30,000 (tax-free) in compensation. You will not have to pay for legal representation – your employer will cover all of your legal costs. A settlement agreement offers you the benefit of knowing that no litigation will take place down the line and that all your rights and obligations are contained in a single document. You can also be sure that your reputation and references will be protected.
What Will Be Included in My Settlement Agreement?
While settlement agreements can differ depending on the workplace and the circumstances of the employee’s departure, most will include information regarding:
- Payment of notice, gardening leave of payment of a sum in lieu of notice
- Your termination payment – how much this will be and when payment will be made
- Employee warranties – these are the promises that you have made as part of the settlement agreement, e.g. not to make a claim against your employer in the future
- Confidentiality and reputation protection
- Any benefits that the employee had, e.g. healthcare
- Handover and practical steps
What Happens if I Break the Terms of My Settlement Agreement?
As a settlement agreement is a legally binding contract, there can be severe consequences if you breach the terms of the agreement. Your employer may seek compensation for breach of contract or apply to the court for an order ensuring you comply with the terms of the agreement, e.g. a confidentiality clause. Your employer may also try to recover any sum they have paid out to you under the agreement if you have breached its terms.
Contact Our Settlement Agreements Lawyers
Our settlement agreement solicitors can take the time to go through your options with you in detail as part of our comprehensive employment law service. Call us today on 0151 541 7766 or complete our online enquiry form.