Our specialist Settlement Agreement Solicitors have acted for numerous employees at all levels including Senior Executives and Directors over the years. Some Settlement Agreements require little, if any negotiation whilst others can be more complex or require additional advice because the employer is refusing to offer fair and reasonable Settlement Agreement terms.
In the meantime we’re put together a set our answers to the most common Settlement Agreement questions we’re asked.
Q: What is a Settlement Agreement?
A: Settlement Agreements (which used to be known as compromise agreements) are legally binding contracts and agreements . They’re typically entered into between employers and employees when an employment relationship is coming to an end or in some cases where the employment relationship has already ended. Most Settlement Agreements guarantee that the existing or former employee will receive defined payments and benefits in return for permanently signing away and compromising their right to take legal action against their existing of former employer.
Q: Why are Settlement Agreements used?
A: Employers decide to offer employees Settlement Agreements for a variety of reasons. In most cases employers offer departing or departed employees Settlement Agreements because they want the certainty of knowing that a binding and legally enforceable agreement is in place stopping the employee from being able to issue or continue an Employment Tribunal Claim. This will typically be the case where the employment relationship is coming to and end because of an employment related dispute or disagreement. It’s important to note however that employers will sometimes choose to offer settlement agreements to employees in circumstances where the proposed dismissal is amicable and/or where there’s no dispute. Perhaps the most common example of this is where an employer offers employees who have opted to take voluntary redundancy an enhanced redundancy payment.
Q: Should I accept my employer’s opening financial offer?
A: This is a good question but there’s no easy answer. It depends on your own circumstances. It’s important that the solicitor advising you understands the circumstances in which your settlement agreement is being offered and the relative strengths and weaknesses of both parties’ positions so that they can form an early view as to whether or not the financial package being offered by the employer is reasonable and should be accepted or whether its been pitched too low and should be improved.
Q: What is a reasonable Settlement Agreement?
In our view a reasonable settlement agreement is one that sees the departing or departed employee receive a sum of money that is reasonable by reference to the terms of their contract of employment (e.g., taking into account their pay, benefits and notice entitlement) and the circumstances in which their employment is terminating. So if the Settlement Agreement is being offered in amicable circumstances where no Employment Tribunal proceedings are anticipated then what we’re really looking for is a Settlement Agreement that offers a reasonable albeit relatively modest level of financial enhancement. This can be contrasted with situations where there is a viable Employment Tribunal claim and/or dispute. In circumstances such as this, we’d typically expect the employer to offer an make a more significant financial payment.
Q: Why do I need to take independent legal advice from a Settlement Agreement Solicitor?
A: We appreciate that this can seem like an unnecessary hurdle particularly where both the employer and employee have already reached an agreement. The requirement to take independent legal advice exists because the law states that you must know exactly what legal rights you’re being asked to sign away. In simple terms its the job of a settlement agreement lawyer to explain the terms and affect of the proposed settlement agreement to you and to make sure that they’ve answered any questions that you have and that you fully understand the Settlement Agreement.
Q: How much does Settlement Agreement advice cost?
A: Our typical free for a standard Settlement Agreement requiring advice and possibly only a little negotiation is between £350 to £500 plus VAT. It’s common for most if not all of our settlement agreement fee to be paid by the employer (you can check your own settlement agreement to see whether your employer is offering to make a contribution to your legal costs and if so, what the level of that contribution is). In some cases however (e.g., where there is still some distance between the employer and the employee in terms of the financial elements of the agreement or where there are other issues requiring negotiation - e.g., bonus or share related issues or restrictive covenants) then our fees will be higher but we’ll always discuss likely and anticipated fees with you from the outset - we don’t believe in any hidden surprises when it comes to fees. We are also able in some cases to agree to enter into Settlement Agreement negotiations on your behalf in return for receiving a percentage of any uplift that we succeed in obtaining for you (typically 25%) together with the agreed employer fee contribution.
Q: What does Without Prejudice & Subject to Contract mean?
A: It’s common for any correspondence relating to settlement agreements to be labelled “without prejudice” and “Subject to Contract”. This wording is used to ensure that insofar as its possible to do so any discussions, emails or other documents relating to a proposal that an individual enters into a settlement agreement cannot subsequently be referred to or used in any subsequent legal proceedings. In our view the ability to enter into correspondence on a legally secret way often helps the parties conclude an agreement and tackle the relevant issues “head-on”.
Q: What is a Protected Conversation ?
Protected Conversations were introduced into UK Employment Law by the Employment Rights Act in 2013. They effectively allow employers and employees to discuss and raise the potential for an individual’s employment to terminate in circumstances where there is no actual dispute between the parties. They’re most commonly used in situations where their are alleged performance related issues but they can be used in other situations too. It’s important to note that protected conversations will not be or remain secret in circumstances where a dismissal is or would be automatically unfair (e.g., where a dismissal would be discriminatory or because the employee was a whistleblower) or where the employer has placed unreasonable pressure on the employee to accept and enter into the proposed Settlement Agreement. It’s important for this reason that employers adhere to the ACAS Code of Practice on Settlement Agreements whenever they decide to initiate and enter into a protected conversation with one of their employees.
Q: Will the payment I receive under the Settlement Agreement be tax free?
A: Frequently yes but its not a guaranteed right. As a rough rule of thumb any sums of money that are due to you contractually (e.g., outstanding pay, holiday pay, bonus or commission payments and notice pay) will be subject to the usual deduction for tax and NI. These payments can be contrasted with genuine compensatory and ex-gratia payments which are linked to the termination to your employment (e.g., statutory or enhanced redundancy pay or an ex-gratia payment made in connection with a threatened or contended employment related claim) which can be paid tax free to the extent that their combined value is for £30,000 or less. Most employers who make tax-free payments to employees under settlement agreements require the individual signing the agreement to enter into an indemnity for tax and so its important for that reason to ensure that the employer deducts all required tax and other payments where it is legally required to do so.
Q: How long do Settlement Agreements take?
A: This really does depend on your own particular circumstances. If your settlement agreement is effectively already agreed and our role is limited to running through the Settlement Agreement with you (either at our offices or remotely via a telephone call or online using Zoom or Microsoft Teams) then its possible for us to offer a same day service. However, if your Settlement Agreement requires negotiation either because you are not happy with the terms that are being offered to you or because our initial view is that the wording of the proposed settlement agreement is incorrect or too onerous and/or we’ve advised you that in our view the Settlement Agreement terms that your being offered can be improved upon then the relevant timeframe will be between one to three weeks depending on the complexity of the legal issues and/or the position that is being taken by your employer and/or its own solicitors and lawyers.
Q: Can I negotiate a reference from my employer as part of my Settlement Agreement?
A: Yes in most cases employers will be willing to agree the wording of the reference that they will provide to any potential new employers as part of the Settlement Agreement. Note however that its becoming increasingly common for employers to provide short and factual references only.
Q: Are Settlement Agreements Confidential?
A: Most employers expect a degree of confidentiality when it comes to Settlement Agreements. The rationale for this being that it might work to their commercial disadvantage for other employees to know what type of payments other employees have received. Additionally a key motivation for lots of employers who enter into Settlement Agreements where there is a dispute is to prevent details of that dispute from leaking out an becoming known publicly. Employer’s are often keen to ensure that their reputations are not damaged or harmed. It’s important for these reasons that if you’re offered a Settlement Agreement that you maintain confidentiality and do not discuss the existence or circumstances of the offer until we’ve had an opportunity of talking to you. We’ll also ensure that any Settlement Agreement that you do enter into does not unlawfully seek to “gag” you in circumstances where the law does not permit your employer to do so.