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Settlement Agreements - Advice for Employers

Posted: 19th December 2012   In: Business Employment, Individual Employment

Overview

A Settlement Agreement is a legally binding contract that is used to settle employment disputes. They can also be called Termination Agreements or Compromise Agreements. In return for receiving a sum of money and/or benefits the employee or ex employee agrees not to pursue claims against the employer. A Settlement Agreement is designed to allow a clean break of the employment relationship.

In order to be legally binding a Settlement Agreement must be in writing and the employee must obtain independent legal advice on the terms of the agreement. The employer will usually offer to make a contribution towards the cost of that advice.

We are experienced in advising on the amounts to be offered to the employee and drafting Settlement Agreements for employers and would be pleased to provide an estimate of our fee for these services.

Frequently asked Questions

Q: In what circumstances should an employer consider offering a Settlement Agreement?

It may be appropriate to offer a Settlement Agreement where the normal employer/employee relationship has broken down, where a redundancy situation has arisen or where, following discussion, there is a mutual agreement to end the employment contract. A Settlement Agreement may be a viable alternative to entering into a performance/capability review or a full redundancy process.

It is sensible to take legal advice before offering a Settlement Agreement as the discussions and documentation surrounding the offer of a Settlement Agreement may have to be disclosed to the Employment Tribunal in any subsequent proceedings brought by the employee.

Q: Can an employee refuse a Settlement Agreement?

An employee can refuse to terminate their employment on the terms offered. Normally this will be on the basis that they do not want to accept the reason given for termination or because they believe that the amounts offered are insufficient.

Q: What payments should be offered?

We will advise you on what is a fair amount taking into account the value of any potential claim the employee may have against you and the payments due in accordance with the employment contract. If the sums offered are insufficient the independent solicitor advising the employee may seek to negotiate an increase.

The Settlement Agreement should provide a breakdown of the various sums offered. These will normally consist of:

Q: Settlement Agreements- are there any formalities?

Yes, the agreement will only be binding if:

Q: What terms are usually contained in a Settlement Agreement?

The typical terms include:

Q: What if the employee believes they have a claim against the employer?

If the employee believes they may have a claim against the employer, for example for unfair dismissal or discrimination the potential value of the claim needs to be assessed and advice provided on whether the sum offered in the Compromise Agreement is a fair settlement sum. If necessary we can negotiate with the employer to increase the amount offered. We may have to charge you for the time spent in doing this.

Q: What are the tax consequences of a Settlement Agreement?

Under an exemption granted by HMRC payments of up to £30,000.00 (in total) to the employee under a Settlement Agreement can be paid free of tax. However how the payments made under a Settlement Agreement are treated for tax purposes varies according to the type of payment:

If the Settlement Agreement includes compensation that exceeds the £30,000 exemption the employer must deduct tax at the OT tax code rate which may mean making deductions at different rates from 20% to 50% depending on the extent to which the payment exceeds £30,000.

Q: Is the employer required to pay the employees legal costs for the independent legal advice on the Settlement Agreement?

There is no legal obligation on the employer to pay for the employee’s legal costs but it is usual to make a contribution towards the costs. This contribution varies according to the sums involved, the complexity of the situation and even the geographical location of the employee. We can advise you on what level of contribution to offer.

For a copy of our presentation on settlement agreements and protected conversations, please click here.