What is a Settlement Agreement?
A settlement agreement is an agreement between an employer and an employee and it usually settles the claim or a potential claim that an employee has brought against his employer.
It often results in the termination of the contract of employment and is usually used when an employee is exiting the company and is used to compromise the claim that the employee might have.
Typically, the employer will pay the employee more than he would get if he actually brought a claim in the Employment Tribunal.
In order to be valid, the settlement agreement has to be signed by an advisor. The adviser must be a solicitor or Trade union official and these advisers have to have a contract of insurance.
The advisor can be any solicitor but if the solicitor is also an expert in employment law, then they can obviously advise the employee regarding the terms of the settlement agreement, and will usually end up getting the employee a bit more money or slightly better terms.
Why do Employers Offer Settlement Agreements?
It often saves time and money, and provides certainty and closure. It is the equivalent of a “clean break” as the employee will not be able to bring employment claims against the employer once the settlement agreement is signed. In exchange, the employee will usually get more money than they would do if they brought a claim in the employment tribunal or just received the statutory redundancy payment.
Will I Need to Pay Tax on my Settlement Agreement?
The first £30,000 of any sums you receive on termination of employment is tax free in a settlement agreement payment, and you typically receive some money which is in respect of the termination, often called an ex gratia payment or redundancy payment.
Some sums which are payable under your contract of employment, such as notice pay, wages, holidays, and bonuses, are all taxable. Therefore, it is important to distinguish between the two.
Are Settlement Agreement Conversations Protected?
The rules regarding without prejudice do not apply to employment tribunals and therefore the law has created “protected conversation” under s.111A of the Employment Rights Act. The idea is that if negotiations break down, one party may wish to refer to what was said when a potential settlement agreement was discussed. If the conversation is protected, it generally can’t be used in any subsequent tribunal proceedings.
Will Employers Pay Legal Fees For Settlement Agreements?
The employee’s legal fees are usually paid for by the employer, but obviously only if you actually sign the settlement agreement.
The typical fees are £350 plus VAT and upwards. The most we ever charged for a senior executive that was paid by the employer was £2000 plus VAT, but the norm is probably £500 plus VAT.
Sometimes the settlement agreement requires the employee to pay for his own fees, but that is definitely the exception and it is often part of the negotiations to increase the legal fees, if that’s necessary.
How do I Negotiate a Settlement Agreement?
You can negotiate yourself and you will generally know the decision-makers better than your lawyer. In my experience, employers don’t generally increase their offer unless the employee can effectively communicate the strength of their case. So legal research or talking to your lawyer first often helps.
Although money is usually the primary negotiation factor, non-monetary considerations, such as a reference or the removal of post-termination restrictions can sometimes be more important to a particular employee.
What Happens if You Receive a New Job Offer Before You Have Signed The Settlement Agreement?
It seems ideal! You essentially get a windfall termination payment from the old employer with a new job ready to start with little or no time out of work. However, it is a common clause in a settlement agreement to state that the employee does not have a job or even the expectation of a job. Therefore, if you already have a job then you will need to try and negotiate out that clause.
However, if you do that then you will alert your employer to the fact that you might have another job offer and this will reduce your ability to negotiate.
Basically, if you do not agree a settlement agreement with your employer then you will have to resign in order to take up the new job offer. You therefore are in a delicate position and we would strongly suggest that you need expert advice.
If you need any advice regarding settlement agreements then please contact Justin Sadler (firstname.lastname@example.org) or Chris Miller (email@example.com) on 01189589711.