There may be circumstances where a settlement agreement (formerly compromise agreements) is offered to terminate employment. For example, poor performance, a breakdown in the employment relationship, mistreatment, poor attendance etc. Whilst internal processes may have been followed, it could be that terminating an employee’s relationship may be a better outcome for both parties. Contrary to popular belief, settlement agreements can be suggested by an employee. However, in our experience, the majority of settlement agreements are offered by the employer.
So, what is a settlement agreement?
“Their main feature is that they waive an individual’s right to make a claim to a court or employment tribunal on the matters that are specifically covered in the agreement”
ACAS: Code of Practice
It is a legally binding agreement (once both parties sign) that generally ends an employee’s employment, the document will outline the terms of the agreement. In some circumstances they can be used whilst employment is ongoing and used to resolve a dispute. A signed agreement will usually protect an employer against claims of unfair dismissal and discrimination. A settlement agreement does not protect an employer against whistleblowing claims, union membership or asserting a statutory right. Settlement agreements should be tailored to the specific circumstances as each case may have its own nuances.
The settlement agreement should include a breakdown of payments that will be paid to the employment such as: a settlement figure, outstanding holiday pay, any pay in lieu of notice, training fees, professional membership fees etc. The agreement should also specify how each payment will be taxed. Previously, the first £30,000 of a settlement payment was tax-free. However, following a change in law in April 2018, pay in lieu of notice (outlined in a settlement agreement) is generally taxable so if an employee works their notice or is placed on garden leave, then this needs to be specified within the agreement. The taxation of settlement monies can be complex and each case is individual so we recommend advice is taken on this.
We advise both parties to seek legal advice when offering or contemplating a settlement. An employee must take advice from an independent adviser, this could be a qualified employment lawyer, a certified or authorised official or a member of an independent trade union. An advisor will review the terms of the agreement to ensure they are fair. The advisor needs to have professional indemnity insurance or an active contract of insurance that will cover any risks to the employee for following their advice. Whilst an employer is not legally obliged to make a contribution towards an employee’s legal costs, it is still advisable to do so, this could help avoid any unnecessary delays. A recommended minimum contribution would be £250.
An employee should be given reasonable to time to consider the settlement offer, a minimum of 10 calendar days is recommended. However, negotiations may extend this period slightly. The employee can still attend work whilst contemplating a settlement offer. It is important to emphasise the confidentiality of any settlement terms offered. There may be sensitive and complex situations where it may not be appropriate for an employee to attend work and these reasons should be explained to the employee.
If you are thinking about offering a settlement agreement to an employee or are an employee who has been offered one and you require advice then please contact us: email@example.com