Settlement agreements are most commonly used to end an employment relationship by consent. They record an employee’s agreement not to bring most claims against their employer in exchange for a sum of money and/or other non-financial benefits.
Claims that cannot be waived are:
- Future claims that are not known about at the time of the settlement agreement
- Claims in respect of accrued pension rights (unless pensions are the subject of the dispute in which case specialist advice may be necessary) and
- personal injury claims that have not yet arisen or are unknown to the parties.
It is important that any agreement does not seek to waive such claims.
Settlement agreements can prevent a potential employment claim from reaching the Employment Tribunal or County Court. They are often used in cases of redundancy. They provide certainty to the employee and employer.
The stronger the employee’s potential claims and the greater their potential value, the larger the payment an employee would expect in return for waiving those claims.
In assessing whether the settlement is fair and reasonable it is important to consider all potential employment related claims, their value and the prospects of success of each one. An employee facing potential redundancy would therefore expect to recover at least what they are entitled to by way of notice pay and a redundancy payment. Otherwise there is generally no incentive to sign an agreement.
Unfairness in selection for redundancy or an unfair pool for selection may give rise to a claim for unfair dismissal. This possibility must be factored into the value of an agreement even in a potential redundancy situation.
Settlement agreements are entirely voluntary. The discussions and negotiations are confidential so cannot be used as evidence in any subsequent claim before the Employment Tribunal or Court.
It is vital that employees are aware of their rights under their employment contract about matters such as notice periods, employee benefits and references as these are relevant to the terms of any settlement agreement. Settlement agreements include contractual payments such as any salary due, payment in lieu of notice, any ex gratia compensation payment for the employment terminating and any other contractual benefits such as bonuses or payment for unused holiday. It is also sometimes possible to negotiate other financial benefits such as the period of a company car or keeping a mobile phone.
Settlement agreements can also deal with non-financial matters such as post termination restrictions about work for a period of time and/or in a particular area or field. These can be relaxed by agreement. If an employment contract contains restrictive covenants that prevent an employee working for a competitor or dealing with certain of the employer’s customers, it may be possible to have them relaxed or released to assist in a search for alternative employment.
Other terms such as confidentiality and an agreed reference can be incorporated into the agreement.
Employers will generally cover the legal fees associated with settlement agreements, either leaving no cost to you or at least providing a contribution towards those costs.
A settlement agreement will set out what notice you are entitled to, including whether you have to work that notice or not. In many cases the employee will be paid in lieu of notice (otherwise known as “PILON‘). Typically, a PILON will be for your full notice in one lump sum, with agreement for an earlier termination date rather than working your full notice.
The tax status of the different amounts in a settlement agreement depends on the nature of the payment. Generally, a termination payment is tax-free for up to £30,000. Most other payments, such as a payment in lieu of notice and holiday pay are then taxable.
In certain cases, and with large employers it is sometimes possible for the employer to provide or fund support and guidance with finding alternative employment. This could be included as part of the agreement.
We at Bailey Wright & Co try to limit our costs, where possible to the amount payable by the employer under the agreement so there is no deduction from any compensation payable to the employee.
We have a discrimination law contract with the Civil Legal Advice Service and are therefore alive to the potential claims for breaches of the Equality Act 2010.
We attempt to turn around settlement agreements within 2 working days of receipt of the agreement, where possible. Settlement agreements can generally be discussed at a face-to-face meeting or via Microsoft Teams. They can be digitally signed, if necessary.
For a without-obligation discussion in respect of a potential settlement agreement please contact Phil Storey on 0121 270 1566 or email.