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Employment Solicitor - Settlement Agreement Service for Employees 
Guide to Settlement Agreements

 
 

I am an employment solicitor specialising in settlement agreements, also known as compromise agreements for senior executives, managers and senior staff. This is my free general guide for employees to some FAQs about settlement agreements.

Before you decide whether to sign a settlement agreement it is vital that you understand the content and consequences and whether the settlement agreement is a good one for you.

Call me now for a free no obligation consultation on: 01223 597832 or 07919 848555 or through my Enquiries Page.

I cover Cambridgeshire, Bedfordshire, Hertfordshire, Essex, London, Suffolk, Middlesex, Buckinghamshire, Lincolnshire, Rutland, Northamptonshire and Norfolk and accept clients from further a field across England.

In addition to advising about the terms and effect of entering into a settlement agreement, my services include negotiating compensation packages and the terms of settlement agreements.

Click on these links for further information on the settlement agreement services I offer to employees and employers and for my home page.

Please note this guide is for the purpose of information only and is not intended to replace, or to constitute, legal or professional advice. Therefore, this guide should not be relied upon as a substitute for specific legal advice about your particular situation or circumstances and you are deemed to have taken notice of the disclaimer at the end of it.

 
 

Be aware that if an employee does not sign a settlement agreement settling their claims, employees only have a short time in which to lodge an Employment Tribunal claim - usually within 3 months of their employment terminating or the problem happening at work. For example, the time limit for lodging an unfair dismissal claim with the Employment Tribunal is 3 calendar months less 1 day from the effective date of termination.

1. What is a settlement agreement?

A settlement agreement is a contract between an employer and employee dealing with the settlement of claims that the employee may have arising out of their employment or its termination.

In a settlement agreement the employee agrees to give up their rights to bring claims and proceedings against their employer usually in exchange for a payment of compensation and sometimes other benefits such as an agreed reference.

A settlement agreement is sometimes also called a settlement or severance agreement.

A settlemente agreement can be entered into during or after the termination of employment.

2. Is a settlement agreement legally binding?

A settlement agreement is legally binding when signed by both parties, but must comply with the conditions regulating compromise agreements set out in section 203 of the Employment Rights Act 1996 (see below).

3. What conditions regulate settlement agreements?

A settlement agreement:-
* must be in writing;
* must relate to particular complaints that the employee may have;
* the employee must receive legal advice before they sign the settlement agreement from a relevant independent adviser e.g. a solicitor about the terms and effect of the settlement agreement and, in particular, its effect, on the employee's ability to pursue their rights before an Employment Tribunal;
* when the adviser gives the advice they must have a contract of insurance or professional indemnity insurance covering the risk of a claim by the employee for loss arising from the advice;
* it must identify the adviser;
* it must state that the conditions regulating settlement agreements have been met.

4. Who will draw up a settlement agreement?

It is usual for the employer's solicitors to draft the settlement agreement and therefore generally will have been drafted to protect the employer's interests. It may be appropriate for the employee or their solicitor to negotiate amendment to the terms of the settlement agreement.

5. Does an employee have to sign a settlement agreement?

An employee does not have to sign a settlement agreement offered by their employer. However, an employer may decline to settle the employee's claims, unless the employee signs a settlement agreement, as the employer will want the employee to give up their rights to bring claims and proceedings against them.

6. Does an employee have to receive independent legal advice before signing a settlement agreement?

Before an employee signs a settlement agreement they must receive legal advice from a relevant independent adviser e.g. a solicitor about the terms and effect of the settlement agreement and, in particular, its effect, on the employee's ability to pursue their rights before an Employment Tribunal. This is one of the conditions regulating settlement agreements (see question 3).

7. Can the employer's solicitors provide independent legal advice to the employee about the terms and effect of entering into a settlement agreement?

The employer's solicitors cannot provide independent legal advice to their client's employees about the terms and effect of entering into a settlement agreement, because they act for the employer and therefore are not independent.

8. Who pays the employee's legal fees for advice about a settlement agreement?

Although it is not obligatory, it is highly usual in a settlement agreement for there to be a clause stating that, if the employee signs it, the employer will pay a contribution to the employee's reasonable legal fees incurred in relation to an independent solicitor advising the employee about the terms and effect of entering into the settlement agreement up to a stated maximum sum.  The maximum sum is often somewhere between £250-£500 plus VAT, but may vary depending on the complexity of the compromise agreement and is sometimes negotiable e.g. if the wording of the compromise agreement needs amending.

The usual payment process is that the employer will pay their contribution to these legal fees direct to the employee's solicitor on receipt of an invoice from the solicitor (addressed to the employee but marked payable by the employer).

If an employee instructs me to advise them about the terms and effect of entering into a settlement agreement, it is usual for my fees for that work to be covered in their entirety by the employer's contribution, unless the employee decides not to sign it (in which case the employee will pay my fees) or the employee agrees with me in writing and in advance to pay an additional fee.

9. Are all compromise agreements the same?

The wording of settlement agreements varies depending on the circumstances of the individual case and who has written it. However, it is common for settlement agreement to contain clauses dealing with matters such as:

* the termination date;
* arrangements prior to termination of employment e.g. garden leave;
* arrangements on termination;
* resignation of directorships;
* what payments and benefits the employee will receive, when and by what method;
* the parties understanding of the tax position;
* a tax indemnity by the employee;
* shares;
* a contribution to the employee's legal fees;
* a reference;
* an agreed announcement of departure;
* a waiver of claims by the employee;
* the return of property;
* confidentiality in relation to the existence, terms and circumstances of the settlement agreement and the negotiations surrounding it;
*restrictions on the use and disclosure of confidential information;
* an obligation by the parties not to make or publish derogatory comments about each other;
* post termination restrictions;
* warranties or promises e.g. by the employee that they have not materially breached their contract of employment or acted in a way that the employer could have dismissed them without notice;
* repayment provisions for breach by the employee of the settlement agreement;
* any third party rights of enforcement;
* the settlement agreement being the entire agreement between the parties;
* variation of the settlement agreement;
* jurisdiction of the courts.

10.Can the compensation in a draft settlement agreement be negotiated?

If an employee receives a settlement agreement, before they decide whether to sign it, they or the employee's solicitors can try to negotiate the compensation package. Whether or not the employer will be likely to improve their offer depends very much on the circumstances of the individual case and the potential risk to the employer of the matter not being settled.

11. Can the wording of a draft settlement agreement be negotiated?

If an employee receives a settlement agreement, before they decide whether to sign it, they or the employee's solicitors can ask the employer/the employer's solicitors to make amendments to it. It is not unusual for there to be a need for amendments, as the wording of settlement agreements will vary depending on the circumstances of the individual case and generally the employer's solicitors will have drafted a settlement agreement to protect their client's interests.  Often employers will agree to make some amendments to the wording of settlement agreements, although they may be less willing to do so if they are making mass redundancies.

12. How long will the settlement agreement process take to complete?

If I am instructed by an employee to advise them about the terms and effect of a settlement agreement, this can often be done within a couple of days of my receiving the settlement agreement to review, unless I need to liaise with your employer or their solicitors to negotiate the compensation package or the wording (in which case the process can often be concluded within 5-10 days).

13. Can the legal advice be given to an employee over the telephone?

I can, and do, advise employees over the telephone about the terms and effect of signing a settlement agreement.

14. Should a settlement agreement detail all payments and benefits an employee will receive?

It is very important that a settlement agreement details all the payments and benefits an employee will receive, when and by what method, as it is usual for settlement agreements to contain a clause stating that it constitutes the entire agreement and understanding between the parties and that the parties have not relied upon any promises or assurances that are not set out in it. In the settlement agreement the employee will also be waiving their right to bring claims or proceedings against the employer.

Therefore, in addition to the payment of any salary and holiday pay accrued due, and the reimbursement of any expenses, the settlement agreement should for example detail such matters as any entitlement to payment in lieu of notice, commission, bonus payments, compensation for loss of employment, shares and any property of the employer that is to be retained by the employee.

15. How much compensation should an employee receive in a settlement agreement?

The amount of compensation an employee should receive in a settlement agreement for loss of employment depends very much on the individual circumstances of the case. However, examples of relevant factors include the nature and strength of the employee's claims, the manner and circumstances of termination, the length of employment, loss of salary and benefits and the employee's prospects of obtaining new employment.

16. What is the payment period for a compensation payment?

The period for the payment of compensation for loss of employment should be stated in the settlement agreement and is usually within 7-28 days of the termination date or the receipt (if later) by the employer of the signed settlement agreement and the signed certificate of the employee's legal adviser.

It is usual for contractual payments such as outstanding salary and holiday pay to be paid through the normal pay roll arrangements.

17. Is a compensation payment in a settlement agreement subject tax and National Insurance?

The tax position depends on the nature of the payments in the settlement agreement. However, generally, the first £30,000 of compensation for loss of employment is not subject to tax or employees' National Insurance Contributions, whilst over that figure such compensation is subject to tax. 

18. Is a payment in lieu of notice subject to tax and National Insurance?

Basically, a payment in lieu of notice (known as 'a PILON') is subject to tax and employees' National Insurance contributions, if the employer has retained the right or discretion to make such a payment in the employee's contract of employment or if the employer routinely makes statutory deductions from PILON payments; otherwise, a PILON will form part of compensation for loss of employment (see question 17).

19. Is holiday pay subject to tax and National Insurance?

When an employee's employment is terminated they are entitled to a payment in lieu of holiday accrued due but untaken. Holiday pay is subject to tax and employee's National Insurance.

20. What is a tax indemnity in a compromise agreement?

It is usual in a settlement agreement for there to be a clause effectively stating that the employee agrees to indemnify the employer on a continuing basis in respect of any claims by HM Revenue and Customs for income tax or employees' National Insurance contributions, other than ones deducted at source, arising from the employee's receipt of the compensation payment.

21. What is a waiver of claims in a compromise agreement?

By signing a settlement agreement the employee gives up/waives the right to bring claims or proceedings against the employer, other in relation to ones expressly excluded from the settlement. Matters commonly excluded are claims by the employee to enforce the terms of the agreement, claims in relation to accrued pension rights and those personal injury claims that the employee is unaware of at the time of entering into the compromise agreement or which have not arisen at that time and that cannot be brought in the Employment Tribunal.

The waiver of claims against the employer will usually be stated to include the waiver of any claims against any Group Company and their respective officers and employees.

22. Will the employer meet the cost of outplacement training?

This is a matter of negotiation between the parties or their solicitors. If the employer agrees to meet the cost of outplacement training, a clause providing for that needs to be included in the settlement agreement.

23. Is an employee entitled to a reference?

An employee has no legal entitlement to a reference.  Therefore, it is common for there to be a clause in settlement agreements stating that the employer will provide a reference to potential employers and those recruitment consultants used by the employer, on the employer's letterhead, and for the wording to be set out in a schedule to the settlement agreement so that it is clear what the employer will say.

It is common for references to include only strictly factual information such as the dates of employment and the employee's job title, although some employers may be prepared to include additional information.

24. Can a settlement agreement deal with an announcement of the employee's departure?

It is not unusual for there to be a clause in settlement agreements stating that the announcement of the employee's departure will be in agreed terms and in an agreed way (in which case the wording of the announcement will generally be set out in a schedule to the settlement agreement).

25. Can an employee disclose to a third party that they have signed a settlement agreement?

It is usual for there to be a clause in settlement agreements stating that the employee cannot disclose the existence or terms of, or circumstances leading up to, their signing a settlement agreement, or the negotiations relating to it, to any third party other than those permitted by the wording of the settlement agreement. Often compromise agreements will specify that the employee may disclose such matters in strict confidence to their spouse/civil partner, their solicitors/accountant and to HMRC only. If the employee needs to disclose any such information for the purpose of claiming upon any employment related insurance policy e.g. mortgage protection, then an amendment should be negotiated to allow for this.

Sometimes settlement agreements will contain a clause stating that prior to signing it the employee has not already breached the confidentiality provisions.

26. Do settlement agreements contain restrictions about making derogatory comments?

It is usual for there to be a clause in settlement agreements stating that the employee will not make or publish derogatory statements about the employer or its officers or staff or which may lower their reputations.

Such clauses are not always expressed to be mutual and therefore sometimes need amending so that the employer is also making the same commitment in relation to the employee.

27. What if the employer fails to pay the compensation payment?

If the parties have signed the settlement agreement and the employer fails to pay the compensation payment, the employee could take enforcement action in the civil courts for the debt.

Disclaimer

This guide is for the purpose of information only and is not intended to replace, or to constitute, legal or professional advice. Therefore, this guide should not be relied upon as a substitute for specific legal advice about your particular situation or circumstances.

Melanie Best does not accept any responsibility for any errors, omissions or misleading statements or for any loss which may arise from any reliance on the content of this guide or document.

Brentwood, Borehamwood, Cambourne, Cambridge - Histon, Cambridge - Castle Park, Cambridge Services, Chelmsford, Hatfield, Hemel Hempstead, High Wycombe, Letchworth, London (including at Canary Wharf, Euston, Leadenhall Street, Throgmorton Street, Oxford Street and London Victoria), Luton, Milton Keynes, Norwich, Peterborough, Potters Bar, Rickmansworth, Slough, St Albans, Uxbridge and Watford.

Any none e-mail correspondence should be sent to my office address at: Melanie Best Employment Lawyer, 1010 Cambourne Business Park, Cambourne, Cambridge CB23 6DP.

 
     
 

I am committed to providing my clients with high quality legal advice and client care. However, in the event of complaints, these will be handled in accordance with my Complaints Handling Policy, a copy of which is available upon request. Please note that a complainant who is dissatisfied with my handling of their complaint can ask the Legal Ombudsman to consider it and that time limits apply. The Legal Ombudsman can be contacted at PO Box 6806, Wolverhampton, West Midlands, WV1 9WJ, telephone 0300 555 0333,enquiries@legalombudsman.org.ukwww.legalombudsman.org.uk".

 
 

Sole practitioner: Melanie Best LLB (Honours)
1010 Cambourne Business Park, Cambourne, Cambridge CB23 6DP
Tel: +44 (0)1223 597832 | Fax: +44(0)1223 598 001 | E-mail: mlb@melaniebestlawyer.co.uk

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