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What is a Settlement Agreement? Advice for Employees

Posted: 20 Oct 2021

If you have recently been advised that you are being made redundant, there is every probability that your mind is racing, you are panicking about the future and you are having sleepless nights. Try to write down everything throughout the process and remember not to rush into making decisions. Make sure you take the opportunity to ask as many questions as you can, and keep a note of every conversation.

In many redundancy situations, employers will want to tie up all the terms in a formal settlement agreement. However, it is important to note that settlement agreements are not always used in redundancy cases. Indeed employers who follow a fair consultation process and decide the redundancy is fair may decide to proceed to dismiss an employee without an enhanced exit package. In these cases, an employer may choose to offer the statutory redundancy pay, or to follow an existing company policy which sets out the amount to be paid. Many employers do however, choose to offer a settlement with an enhanced redundancy payment in order to ensure the employee makes a smooth exit from the business, and also to protect themselves against any claims.

Each Settlement Agreement will vary, but ordinarily we would expect the documents to include sections that deal with the claims to be settled, the payments to be received detailing the relevant tax issues, and a confidentiality clause, as well as any agreed reference from your employer.

What is a Settlement Agreement?

A Settlement Agreement is a legally binding contract between employer and employee which, in the context of a redundancy, provides for a severance payment by the employer in return for your agreement not to pursue any claims in an Employment Tribunal. Settlement agreements are a very useful way of ensuring that employment disputes are concluded without either side having to take legal action. 

Why do I need a solicitor?

A Settlement Agreement will only become binding in law if a solicitor, a certified trade union or recognised adviser signs it off. This means it is a legal requirement that you seek advice from a qualified professional. This is to protect you before you agree to waive your rights to take an employer to an Employment Tribunal.

How are terms decided within a Settlement Agreement?

The terms of the Settlement Agreement will be negotiated and agreed between you and the employer and then set out in the written Settlement Agreement document.

Is the amount of money offered by your employer fair?

A good employment solicitor can help advise you if you are getting a good deal. They will be able to identify if you have any grounds for a claim against your employer such as discrimination or unfair dismissal. For example, if you were selected for redundancy and then offered a Settlement Agreement on the basis that you informed your employer that you were pregnant, or because you are an older employee who has reached a certain age and your employer is trying to encourage you to retire.

If you decide that the terms of the agreement are fair, your solicitor will sign off the Settlement Agreement to ensure a speedy settlement.

If your solicitor advises you that you could negotiate for more money, and you agree, they will negotiate on your behalf to secure a better deal. This may mean the solicitor helping you to raise a grievance. If a dismissal has taken place, your solicitor will assist with your appeal.

What are the usual payments?

Compensation for loss of office

The Settlement Agreement will set-out the breakdown of payments that are due to you and whether any sums will be paid free of tax. A payment of up to £30,000 compensation can be paid without tax being deducted if it is a compensatory rather than contractual payment, known as an ex-gratia payment.

Notice payment

If you are being paid in lieu of notice, this will be covered within the Settlement Agreement.

Bonus and commission

Any bonus or commission payments due should be set out in the agreement. A solicitor should check your contract to make sure that all contractual bonuses and commissions are paid in full.

Pension

Unless your contract says otherwise, pension contributions should continue for the length of your notice period. If part of your settlement is that a lump sum is to be paid into your pension you may be able to benefit from this being tax free. Your solicitor will need to advise you in relation to ongoing loss of pension, particularly if you have a final salary pension. 

Post-termination covenants

The Settlement Agreement may list out the post-termination restrictive covenants that are in your contract. Your solicitor will check that the scope of these covenants has not been increased by your employer. Your solicitor will also use the value of the restrictive covenants to your employer to help assess the fairness of the amounts offered to you.

Confidentiality

The confidentiality clause is an extremely important part of the Settlement Agreement for your employer. Sometimes the scope will need to be reduced to allow you to tell future employers about the circumstances of your departure. Confidentiality clauses will also usually prevent you making comments in the press or on social media about your employer.

Understanding and complying with the terms

It is essential that you understand everything within the Settlement Agreement and if there is anything you are not able to comply with, or any term which you have already breached, you must discuss it with your solicitor. This includes if you have told colleagues about your negotiations before you saw the confidentiality clause. If you sign up to a clause that you have already breached it opens the door for your employer to refuse to pay the settlement or to claw back money they have already paid to you.

How much will it cost?

Your employer should expect to pay a contribution towards your legal fees of between £250 and £500 (plus VAT) depending on the complexity of any issues raised. In some cases, your employer may pay up to £1,500 if there are complicated post-termination covenants or if a second signing is required where you are working your notice.

If you take advice from a solicitor about a Settlement Agreement, but you decide not to accept the terms offered, then you may be liable to pay your solicitor’s fees. Your employer’s commitment to pay your legal fees is only valid if you sign the Settlement Agreement.

What service will Emma Gross provide?

As a specialist employment lawyer dedicated to advising on redundancies and settlement agreements, Emma will advise you fully on all the implications of signing the Settlement Agreement and will endeavour to ensure you obtain a sum that represents the strength of your potential claims together with a reference.


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