Settlement Agreements FAQ
If you have been offered a Settlement Agreement by your employer then it may have come as a surprise. Even if you were aware that it was happening, once you actually receive the Agreement, it may seem a daunting proposition. Why is the Agreementso long? What do the terms mean? Should I accept the offer? What are my options if I don’t sign the Agreement? Will it cost me anything? Below are answers to some of the most commonly asked questions regarding Settlement Agreements:
What is a Settlement Agreement?
A Settlement Agreement is what used to be known as a Compromise Agreement and is a legally binding agreement in which the employee agrees not to pursue a claim against his employer and waives their right to do so, and in return receives a sum of money.
Why is my employer offering me this Agreement?
The circumstances will vary from case to case. It may be that there is an ongoing dispute that your employer wants to resolve or perhaps they are offering the Agreement as an alternative to starting disciplinary procedures. The main reason, however, is that a Settlement Agreement is the only way for your employer to ensure that you cannot pursue a claim against them.
Why is the Agreement so lengthy?
In order for the Agreement to be legally binding then there are certain requirements that it must meet. This is to protect both parties. The requirements are:
- The Agreement must be in writing;
- The agreement must relate to a particular complaint or proceedings;
- The employee must have received independent advice;
- The independent adviser must be covered by a professional indemnity insurance policy;
- The agreement must identify who the independent adviser is; and
- The agreement must state that the legal conditions regulating settlement agreements have been met.
In addition, there are a number of common clauses that are found in almost all Settlement Agreements, such as:
- When your employment will end;
- How much money you will receive, what the payment(s) are for, and when you will receive the payments;
- Whether the payment(s) will be subject to tax or not;
- A clause indemnifying the employer against future tax payments;
- A list of the claims that you are agreeing to waive your rights to pursue;
- A confidentiality clause preventing the parties discussing the agreement;
- What reference will be provided;
- What will happen if a party breaches the terms of the agreement;
- How much the employer will contribute to your legal fees;
- Warranties from the employee that they have not committed an act of gross misconduct or in some circumstances, that they have not already obtained new employment;
- The return of company property;
- That neither party will make any adverse or derogatory comments about the other.
What am I actually agreeing to?
You are waiving most of your legal rights arising out of your employment. They include statutory rights (arising from laws made by Parliament), contractual rights (arising from your contract of employment) or common law rights (arising from general law such as personal injury or negligence). By signing the Agreement you are agreeing not to pursue such claims. A number of statutory claims cannot be waived unless they are done so in a Settlement Agreement.
How much will it cost me?
Although there is no legal requirement to do so, most employers will contribute towards the cost of taking independent legal advice. The amount varies from employer to employer but is usually at least £250 + VAT. This is usually sufficient to cover the cost of the advice, however, if there is a lot of negotiation required to finalise the agreement and the costs exceed the contribution from your employer, then you would be responsible for these additional costs. It is possible to try and negotiate an increased contribution from your employer in these circumstances.
How do I know if I am getting a good deal?
The offer and its merit will depend on your specific circumstances. You should be given the opportunity to explain the background to your solicitor as to what has happened prior to you being offered the settlement agreement. This will allow your solicitor to advise you on what, if any, claims you may have, what the merits of any such claims are, and possible values of those claims. You will then be able to assess whether accepting the financial offer made by your employer is a good deal for you.
As a minimum you should receive any statutory (accrued holiday, notice pay etc) or contractual (salary, bonus etc) payments due to you plus something extra as an incentive.
Are there any other factors that I should consider?
There are other factors to consider as well, such as your own personal circumstances, how long you think it might take to find alternative employment, the alternatives to accepting the offer (see below), that you will receive the money quicker this way rather than having to wait for an Employment Tribunal hearing.
Will I have to pay tax on the money I receive?
Contractual payments such as accrued holiday pay or bonuses will be subject to tax & national insurance. Notice pay will be taxed if you work your notice or if you are paid in lieu of your notice and there is a contractual right to do so (a PILON clause). If, however, you are paid in lieu of your notice and there is no PILON clause in your contract then you may be able to receive the money without having tax & national insurance deducted.
Any payment for compensation for the loss of your employment, often known as an ‘ex-gratia’ payment, will usually be tax-free up to £30,000.
As per the common clauses referred to above, there is usually a clause in the contract providing that you will be responsible for any tax that Revenue & Customs deem should have been paid on the agreement that has not been (tax indemnity). Given the values sometimes involved in settlement agreements, it may be appropriate for you to take advice from a tax specialist.
What happens if I do not sign the Agreement?
This will depend on the circumstances in which the Agreement has been offered. If, for example, you were due to face disciplinary proceedings and the Agreement was offered to you as an alternative to those proceedings, then rejecting the offer will likely see the disciplinary proceedings re-commence and possibly the termination of your employment. You may have been offered an enhanced redundancy package which if you reject will see the redundancy process continue and if you are selected you may only receive a statutory redundancy payment.
If you have strong claims which your employer is unwilling to compensate you to your satisfaction for, then to pursue these you will have to pursue a claim in the Employment Tribunal. To do this you must first register your claim with ACAS for early conciliation and this will normally need to be done within 3 months less one day of the date of the act you are complaining of.
If having taken advice you decide not to sign the agreement then your employer will not make a contribution towards your legal fees and so you will be responsible for any fees incurred.