revised: March 2017
This is a complete and independent Settlement Agreement guide, providing you with the best and most up to date information around – we keep this updated often, but remember it is a guide and if you have any questions then please use the ‘contact’ button above to get in touch with us.
- Settlement Agreements used to be called Compromise Agreements
- Settlement Agreements are legally binding
- Settlement Agreements can waive an individuals right to bring an employment claim against your employer
- Settlement Agreements are entirely voluntary
- A Settlement Agreements can be negotiated
- The employee must get legal advice
- The employer usually pays for the employee to get this legal advice
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Settlement agreements are a staple of any employment solicitor and we are no different. We provide advice on Settlement Agreements, check and give straightforward legal assistance to individuals that have a settlement agreement from their employers. We can also assist employers drafting agreements to provide to employees if required.
As this area of law can be a little complex, we decided to put this site together so that we could share out experience and knowledge with you. It’s a comprehensive guide that explains everything you ever wanted to know about the incredibly exciting topic of settlement agreements.
What is a Settlement Agreement?
Originally called compromise agreements when launched in 1993, a settlement agreement is a legal document that records a formal agreement between the employee and employer. In a nutshell, the employee receives a payment in order to sign the agreement which in turn waives their right to sue their employer for any type of employment claim.
Note: From a practical perspective there is no difference between an old Compromise Agreement and a Settlement Agreement.
A settlement agreement can be used in a variety of circumstances and these days is a very commonly used document with UK HR departments and businesses; however the most common situations where a settlement agreement may be offered are:
- Redundancy of an employee – where the employer is paying an enhanced redundancy payment. This frequently happens in the Civil Service and in the NHS in particular where the scheme providing an enhanced payment and therefore a settlement agreement is called the Mutually Agreed Resignation Scheme (MARS).
- Breakdown in the employment relationship. Perhaps an employee is under performing in the employer’s eyes, and rather than go through a time consuming and unpleasant performance management process, the employer may offer a settlement agreement as an quicker and frankly less painless alternative to this. This could equally apply if there were potential disciplinary proceedings to be brought against an employee and this is another way of dealing with this issue rather than following a disciplinary process (which is again a less painful route for both parties), which if handled incorrectly could lead to the employee having a claim for unfair dismissal – so a Settlement Agreement route would be advantageous for the business.
Do you need legal advice on a settlement agreement?
In short – yes. As you are waiving legal rights, legislation dictates that you must receive independent legal advice from a properly qualified advisor (which statue defines as a qualified solicitor, equally qualified legal professional such as a member of Cilex or an appropriately qualified trade union advisor).
Not only must the specific advisor be identified in the agreement but they must also sign the agreement as well.
This has been defined in UK Employment Law to protect the employee and to ensure that the agreement being signed is legal (and above board) and to some extent to ensure that the financial settlement is adequate.
Who pays for this legal advice on a settlement agreement?
Your employer will typically agree to pay a contribution towards the legal costs of you getting advice (this is because ultimately the settlement agreement protects them against any future Employment Tribunal claims). The amount they contribute varies, but usually starts at around £350 + VAT, and is typically no more than £500-600. It is also the norm that the more senior the employee, the greater the level of contribution (for example for a director of a company the contribution may be £750-£1000 + VAT – as a director leaving tends to require more legal advice than an ‘regular’ employee).
Because of this we will never charge more that the employer contribution if the agreement is straightforward and you simply need advice on the terms of it, so in these circumstances you do not have to pay anything additional.
If we need to negotiate on your behalf then we may need to charge extra for the additional workload, but typically we will only charge extra when we win an improved financial deal for you, but you will never be worse off.
Do I Have To Accept The Settlement Agreement As Drafted?
No. If the payment under the agreement is not adequate compensation in the circumstances, either ourselves or any other qualified solicitor would likely tell you not to sign the agreement. It is not as black and white as ‘sign the agreement or don’t’ (although many employers try to paint the offer in these terms). There is, of course, a third option which is to try and negotiate a better settlement under the agreement.
One important point to mention here is the effect of trying to negotiate the settlement figure. Without boring you too much with legal jargon – under contract law – the company has made you an offer under the settlement agreement. If you return to them with a counter offer (asking for more money or an amendment to any terms), this constitutes a counter offer, which legally speaking has the effect of rejecting the initial offer.
So just as a word of warning, by trying to negotiate your employer could take the entire deal off the table. Now in our experience (and we would estimate we have dealt with over 1000 settlements), we can only remember an employer taking a deal off the table twice. So it is a very rare instance – but ultimately this is something you should be aware of as if the deal is pulled – it is you that potentially loses that money not us.
If you wish us to use our knowledge and experience to negotiate for you or do additional work outside of just explaining the agreement to you in plain English, for example, negotiating a better settlement agreement then there may be a need to charge you more. But in these circumstances we take a pragmatic and reasonable approach and suggest if we are able to obtain you a higher settlement we shall agree a fee with you (based on our hourly rate and the amount of time it has taken us to do the additional work you require) to be paid in addition to the employer’s contribution.
However if we are unsuccessful in achieving your goals, and no increase is forthcoming from your employer, then we will not charge you the extra as we believe that it is unfair that you should have to lose some of your original compensation payment to further legal fees, where we have not added value to your case.
Valid settlement agreements
For a settlement agreement to be legal several conditions need to be met, these include:
- The agreement has to be produced in writing
- It must be clear as to which specific employment claim the departing employee could possibly make against their employer
- The employee must also have received independent legal advice and their agreement must identify the specific advisor
- The independent adviser must have a current contract of insurance (or professional indemnity). This will cover the risk of a claim by the employee in respect of loss arising from the advice given, and
- The settlement agreement must state that the applicable statutory conditions regulating the settlement agreements have been met.
A good solicitor will make ensure that the settlement agreement put in place satisfies all the required legal requirements and will take you through the agreement step by step to ensure that you fully understand every clause in plain English. If any of these requirements are not met – then the agreement is not legally enforceable. This is usually a greater problem for the employer as it is them that seeks the protection of the agreement, namely they cannot be sued by the employee. We have seen many poorly drafted settlement agreements that fail to meet the above conditions and the end result was that the employee received an additional sum of money, and was still able to sue their employer due the fact the settlement agreement was invalid. So employers take note – ensure your agreement meets the above conditions or it will ultimately be a waste of time.
Do I Need a Settlement Agreement?
A number of people that we speak to are surprised that they have been presented with a formal settlement agreement as they are under the impression that they are leaving their former business on good terms; however employers use a settlement agreement just to ensure that they stay safe. They want to ensure that no matter how good the relationship is right now, you do not claim against them in an Employment Tribunal in the future.
There are also other reasons to offer an employee leaving on good terms a settlement agreement such as trying to induce them into a longer restrictive covenant or perhaps asking them to sign over certain Intellectual Property rights that they might have in their possession.
Is It Safe To Sign Away My Employment Rights?
Absolutely, although signing the Settlement Agreement means that you will not be able to take any legal action against your employer in the future (relating to an employment claim), it really should be OK to do so, but you need to get the right legal advice to ensure you are not signing away a more financially lucrative claim.
Hence the reason why in law you need to get independent legal advice.
Depending on the help or legal advice your employer has will depend on the level of the potential claims that they will list, and by signing the settlement agreement you will not be able to bring a claim for the issues listed, so if you think that you may have an employment claim then you need to let your advisor know straightaway, they will then be in a position to be able to advise you on whether the settlement being offered is appropriate to your specific situation.
It is also the norm in most settlement agreements for them to take a belt and braces approach and for the company to list every possible employment claim you could have against them just to protect themselves. The major reason you must receive advice is to ensure the compensation you are receiving is a fair reflection of your circumstances and that the company is not trying to “low-ball” you.
How Much Should You Be Offered In Your Agreement?
This really is a tough question but one that we probably get asked most often. The answer is that the financial offer depends on a number of factors; your employer will make you an offer that should be appropriate, this will be your termination payment (it might be referred to as a compensation for loss of office payment or an ex-gratia payment), and it often takes account of your salary, notice period, contractual benefits and length of time that they want you pay you for as a non-exhaustive list.
We can’t say exactly what you should be offered, but it should reflect the role and salary you are giving up and compensate you for any potential claim you are waiving.
We have seen a number of “settlement agreement calculators” on the internet, and frankly speaking, and in our humble opinion, these are useless. There are so many different factors (as detailed above) that impact on the level of the payment under a settlement agreement that is it impossible to provide a calculator with any accuracy at all.
It is far better once you are in receipt of an offer to contact us to discuss the level and provide us with the information we require to be able to provide with the correct advice regarding the level of the proposed payment.
All conversations of this matter are in the strictest of confidence.
What If the Termination Payment is Unfair?
You need to talk over any concerns on the payment with your employment solicitor, we can take the emotion out of the agreement and give you our honest opinion as to whether the payment and agreement seems reasonable and fair.
We will always ask our clients a number of questions, typically around salary and job role etc., but also ask if there is an employment claim that you could bring against your former employer?
Once in receipt of that information we will then look at the claim to see if you are likely to be successful in an Employment Tribunal (and explain this process, the costs and time involved etc to allow you to fully appraise the options available to you), and if we are likely to be successful what compensation you would be likely to get. There have been many times where our advice to clients has been to not sign the agreement because the level of payment is simply inadequate for their individual circumstances.
If you potentially have a strong case to make then we would fight for an improved termination agreement (and payment). However please read the section above under the subject heading “Do I Have To Accept The Settlement Agreement As Drafted?” for the legal effect of trying to negotiate the sum payable or the terms of the agreement.
Is It OK To Negotiate a Settlement Agreement?
Most of the clients we speak to are happy with what they have been offered with their agreement, in fact all they want to do is sign it and get on with their lives, particularly if the agreement or termination has been as a result of their own request.
However, some of our clients feel that they haven’t received the offer that they deserve, in these situations it might be appropriate for me to assist them to get a better deal.
The strategy we employ to aid negotiation differs depending on whether or not our client has a good potential claim and whether or not the initial offer was fair.
We may look to negotiate based on good will; if you’ve well for the company in the past, provided lots of sales for example, never had any disciplinary issues etc. All this could help convince your employer to make a higher payment, which is certainly better in your pocket than theirs!
We will work with a client and discuss negotiation options where appropriate but again would stress before any negotiation takes place you need to be fully aware of the implications detailed under subject heading “Do I Have To Accept The Settlement Agreement As Drafted?” for the legal effect of trying to negotiate the sum payable or the terms of the agreement.
Is The Termination Payment Taxable?
This is very common question that we get asked. So where is our view on Settlement Agreements, income tax and national insurance.
In general terms, the first £30,000 of any termination payment is usually exempt from tax (this is designed to allow both parties to settlement quickly without resorting to litigation). These sums will usually be described as either an “ex gratia” payment or as “compensation for loss of office”. There are available tax free because they are not contractually based payments. Any payment that flows from your contract of employment should be taxable.
Other contractual payments, are taxable, such payments include:
- Salary (also during garden leave)
- Contractual bonus or commission
- Contractual payment in lieu of notice (PILON)
- Customary PILONS (where there is no contractual clause but it is custom and practice at the company that employee’s are paid PILONs)
- Golden handshakes and payments under a change of control clause; and
- Consideration for entering into restrictive covenants and/or confidentiality clauses.
The tax of any payment in lieu of notice (PILON) that is due will will depend entirely upon your employment contract and whether the payment is contractual or not.
If you have a PILON clause in your contract of employment then your employer is obliged to make the relevant tax and National Insurance deductions. However where there is no right to PILON in your contract (and as mentioned above there is no custom and practice at the company that PILONs will be paid) then it will normally be free from tax.
The reason for this is that technically speaking, the company is breaching your contract by paying you in lieu, and therefore you can then have this sum as “damages for breach of contract” which again are tax free, subject to a maximum of £30,000.
If this is an area that you are particularly concerned about taxation then let your solicitor see a copy of your contract of employment, and particularly the notice clause and they will be able to explain the taxable status of your notice payment.
If you have any worries about PILON and the tax you are paying then just send your solicitor a copy of your employment contract and they should be able to give you some advice. It is a tricky area and over the years we have personally seen settlement agreements that have made the PILON payment taxable when it really shouldn’t have been, and saved clients some money by taking this payment from the clutches of the HMRC.
You should also be aware that the Government has recently announced proposed changes to termination payments, due to come in effect in April 2018. These proposed changes include making all PILONs taxable (whether or not they are contractual) and also making National Insurance (NI) contributions payable on any sums over the £30,000 tax free allowance (currently if you receive an ex gratia payment over £30,000, tax but not NI is payable on the sum over £30,000).
Can I Get Paid For Holiday That I Haven’t Taken?
Absolutely you can. It’s common for individuals to have not taken their full holiday entitlement, and in these situations you do have the legal right to be paid for it (and this is taxed the same way as your salary).
Note: This only applies to your statutory (normal) holiday entitlement only.
The payment expected for any accrued but unused holiday is always calculated on the basis of the annual salary divided by the number of working days for each days holiday entitlement. Note here that it should always be based on the number of working days and not the number of calendar days.
So the actual calculation of a single day’s pay for a full-time worker is 1/260 of their annual salary (as there are approximately 260 working days in any 12 month period).
It’s also worth noting that the law specifically will not allow an employer to deduct money from an employee’s final salary where the employee has taken more holiday than their entitlement, unless there is a contractual right to do so. This clause is very common in a properly drafted employment contract so most companies now deal with this in their contract of employment.
What Else Could There Be In Your Agreement?
Like we said earlier, most agreements are different but here are a few standard clauses you’re likely to find in one.
The reason for termination
It’s a common misconception, by law your employer does not have to provide a reason for ending your contract in the settlement agreement, but where a reason is shown, it must be consistent with any reference that your employer later provides. You would also want to make sure this clause dovetails with any reference clause (detailed below).
Note: Providing a reason for termination could be important if you have any form of income protection insurance as some of these policies will only pay out in certain situations such as redundancy.
Without prejudice and subject to contract
Settlement agreements are usually always marked with the words ‘Without prejudice and subject to contract’.
This essence this term simply means that the agreement can never be used as evidence in an employment tribunal (‘Without prejudice’) until it has been signed. It is effectively a fancy, legal way of saying “off the record”.
‘Subject to contract’ is used when both parties do not intend any legal consequences to flow from the communications. i.e. neither your employer or yourself is under any commitment until all the legal formalities have been finalised. (i.e. you have sought legal advice, fully understood the agreement and both parties and the solicitor advising the employee have signed it.)
Will you get a reference?
There is absolutely no obligation on a former employer to provide an employee with a reference. Further, and to dispel a common myth – even if you take your case to an Employment Tribunal and win – a Tribunal does not have the power to force the employer to provide you with a reference.
However, it is very common to include in the settlement agreement a term stating that the employer will provide a reference in an agreeable form and content.
Where possible we always attempt to get a full and comprehensive reference agreed with both parties, but sometimes, it can be simpler and better for just a short statement to be agreed that confirms that the individual was employed, their job title and the specific dates of the employment. The vast majority of references these days generally follow this format so it will not be an obstacle to obtaining a new job.
This reference is then typically annexed to the agreement and we always advise this to our clients to protect their future employment.
Any garden leave
It’s possible that your agreement may indicate that you will be on (what is termed) ‘garden leave’ (meaning that you are not expected to go into the office) until your employment ends (again as long as the employer has a garden leave clause in their contract); you will still be employed but you’re OK to stay at home. Sometimes (but not very often) employers will leave you with a company phone and laptop so that you could do some work if needed to.
We find that most people are more than happy to be on garden leave because they continue to get paid without having to attend work.
You must remember however that you are still a company employee and therefore still bound by your employer’s will and management; so for example you must still ask for approval for holiday or time off.
As you are still under the authority of the company you may also be asked to undertake work related tasks.
One point to mention here – as we have seen it many times – is when employees try to “have their cake and eat it” by being placed on garden leave by their current employer and then start work for a new employer – meaning they are being paid double for a period of time. This would absolutely be classed as a breach of the garden leave terms and thus the agreement, meaning if the old employer found this out – they would likely stop any future payments due under the settlement agreement and ask for any payments already made back.
The Adviser’s Certificate
All settlement agreements will include a certificate for your adviser (solicitor or equally qualified professional as detailed above) to sign and date. This certificate confirms that you have received the required legal advice .
Remember that the settlement agreement is only legally complete once everyone (employee and employer) have signed it and the adviser has provided the relevant signed certificate.
Employers will often ask for the advisors certificate to be placed on the company letterhead of the advisor as a further precaution.
How Long Does The Offer Of A Settlement Agreement Last For?
There is no legal time limit, but your employer will not keep the offer on the table indefinitely. We would highly recommend that you seek the advice of a solicitor as soon as you have received it. ACAS have produced helpful guidance on settlement agreements generally which is available to view here (www.acas.org.uk/media/pdf/n/h/Settlement-agreements-a-guide.pdf). The guidance suggests that an employee should be given 10 days to consider a proposed settlement agreement and that if the employer offers less time than this – and pouts pressure on the employee to accept in a short space of time – this could be viewed as “improper behaviour” which could have an effect on the enforceability of the agreement. This is quite a complex side topic and not something we intend to bore you with here!
Are Settlement Agreements the Same as Compromise Agreements?
In a nutshell – yes. Compromise agreements were the previous name for settlement agreements and whilst there are some minor differences between the two, for all intensive purposes and from a lay person’s perspective they are the same thing. The terminology changing the name from compromise agreements to settlement agreements came into effect on 29th July 2013.
Free Settlement Agreement Consultation
If you have been given a settlement agreement (or believe that you will be offered one) then you will need to make sure that you receive legal advice as soon as possible – get in touch with us today.
We advise clients throughout the UK and Wales, and even clients abroad (where the settlement agreement is governed by the law of England & Wales).
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