Common questions about Settlement Agreements
Here are a few of the common questions we're asked about settlement agreements. If you have a different question that you can't find the answer to below, please don't hesitate to
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A settlement agreement is a binding contract between an employee and their employer (or former employer) under which the employee agrees to waive their rights to pursue claims against their employer, usually in return for some kind of enhanced compensation payment....
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In most cases the benefit of a settlement agreement for you is the payment of an enhanced sum of money to help you to move on from your role – a financial cushion from which you can look for a new job....
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Settlement agreements are offered in a variety of situations, from redundancy situations to performance or conduct issues, due to a grievance that has been raised, or due to legal proceedings against an employer...
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A settlement agreement is a contract between an employer and employee (or former employee) designed to settle workplace claims. An NDA (non-disclosure agreement) is the name given to an agreement, usually in a commercial context, where the parties agree terms to safeguard their commercially sensitive confidential information....
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You will often see this heading written on the top of settlement agreements or correspondence relating to negotiations or an offer of a settlement....
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A “protected conversation” (under section 111A of the Employment Rights Act 1996) is a way for your employer to have an “off the record” conversation with you to explore options for you to leave the business, even if there isn’t technically any dispute between you...
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An ex-gratia payment is a payment made to an employee (or former employee) by an employer where there is no legal obligation for such a payment to be made. It is the name given to describe a payment that is over and above the sums you are entitled to receive...
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As well as compensation in return for a waiver of claims it is likely that the agreement will include terms dealing with you handing back your employer’s property, the reference you can expect to receive, non-disclosure and confidentiality obligations, and any post-termination restrictions that could impact on what jobs or activities you can do in future...
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The level of payment that you can reasonably expect will depend on a range of factors, including age, length of service, salary, benefits, notice period and others....
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What is an average settlement agreement payout?
Each case depends on its own facts. Comparing, or trying to look at averages isn’t very helpful in these circumstances because in each case it will depend on the context and particular leverage of the parties. There is no one size fits all. Our experience in handling hundreds of settlement agreements means we are well placed to advise you on your specific deal.
Who drafts a settlement agreement?
The employer (or their solicitor) will usually draft the terms of the proposed settlement.
How long should I be given to consider the offer of a settlement?
You do not have to accept a settlement agreement, and you should never feel forced into accepting terms.
For a settlement agreement to be binding it is a legal requirement that you take legal advice on its terms (and your adviser will need to sign a certificate, usually annexed to the agreement, to confirm that you have received that advice). We are experts in this field and frequently advise employees on the terms of settlements so that they can be sure they understand the terms and are getting the best deal for them.
You need to be given enough time to obtain that legal advice. There is ACAS guidance that, as a general rule, ten calendar days should be allowed to consider the proposed formal written terms of a settlement agreement and to receive independent advice, unless the parties agree otherwise. This is not a concrete rule, and in certain cases a shorter time frame may well be given, but 10 days is a good rule of thumb. As advisers we are used to turning these things around quickly to ensure any deadlines are met.
Will my employer cover my costs?
Because an employer obtains the significant benefit of a waiver of claims, and because the employee has to take legal advice on the deal, it is customary for the employer to cover, or at least make a contribution towards, the employee’s legal fees.
How does a settlement payment compare with a tribunal award?
Unless you have a generous employer the context for any settlement is likely to take into account the likely award in any employment tribunal or court proceedings. It is often better to settle earlier for a certain sum without incurring the costs associated with legal proceedings.
How much should you get for a redundancy settlement?
There are a number of factors in play here:
1. Your notice period and whether you are expected to work your notice period;
2. There is a minimum statutory redundancy payment calculated with reference to your length of service and age – the government’s calculator can be found here - https://www.gov.uk/calculate-your-redundancy-pay ;
3. Whether your employer has a more generous approach to redundancy payments – some employers enhance the statutory calculation;
4. Whether your selection for redundancy or the process adopted was unfair – in these circumstances you will have a claim for your losses flowing from that unfair dismissal including lost income.
How do I ensure my settlement agreement is legally binding?
A waiver of statutory employment rights claims in a settlement agreement will only be valid if the employee has received independent legal advice on the effect of the agreement, and in particular on their ability to bring the claim(s) in question.
Will you be taxed on the ex-gratia payments in your Settlement Agreement?
An ex gratia payment is a payment made by the employer without any contractual obligation to do so. For instance it will not include notice periods or holiday. The first £30,000 of any ex gratia payment may be paid tax free.
If you have been made redundant, will redundancy payments be payable tax free?
The statutory redundancy payment will be paid tax fr4ee. Any other elements of the redundancy payment will be subject to the usual tax rules. So sums contractually due will be taxable and genuine ex gratia payments up to £30,000 will be payable tax free.
What about pension contributions?
Subject to annual allowances pension contributions can be paid tax free.
Will your pay in lieu of notice be taxable?
Yes.
Will your salary, bonus and benefits be subject to tax as normal?
All contractual sums will be taxed as normal.
What is Post Employment Notice Pay (“PENP”)?
PENP is a statutory calculation to assess what tax should be payable on a termination payment. To the extent that a payment can be attributable to the period of notice that should be given under the contract the payment will be taxable. PENP is the basis for the HMRC tax calculation.
If you have accrued but untaken holiday, will the pay in lieu be taxable?
Yes
Are contributions to outplacement services taxable?
Payments for re-employment counselling and similar training for employees can be tax free if they fall within the tax exemption for counselling services provided by the legislation.
Should the consideration payment for restrictive covenants be subject to deductions?
Restrictive covenants seek to restraint the employee from competing after termination of employment. If there are new restrictive covenants in the settlement agreement then the only way they can be legally binding is if a payment is made by way of consideration. That payment will be taxable.
Taxation of share options and share awards
Such payments will be subject to the tax rules applicable to the scheme in question.
Can payments for personal injury and injury to feelings following discrimination be paid tax free?
These can be paid tax free in certain circumstances and advice should be taken.
What if the termination payments stagger a tax year?
The general rule is that there can only be one £30,000 ex gratia payment for termination. The tax to be paid on the taxable element of the settlement will be calculated with reference to the tax year in which it is paid or the employee can require it to be paid.
What Legal fees are involved with a Settlement Agreement?
A contribution to legal costs incurred solely in connection with a termination of employment where a settlement agreement is agreed between employer and employer may be paid tax free by the employer subject to certain HMRC rules.
