Settlement Agreements - What Employees Need to Know

Settlement Agreements - What Employees Need to Know

What is a settlement agreement?

Settlement agreements (previously called compromise agreements), are legal agreements between an employer and employee.  They normally involve payments to an employee but this is not always the case.

The purpose of a settlement agreement is to provide a formal means by which an individual agrees that they will not bring particular claims against their employer.  They are one of two ways in which an employee can give up employment rights and the other is via an ACAS settlement agreement (an ACAS COT3 agreement).

A settlement agreement normally sets out all the arrangements connected with an employee leaving their employment and/or giving up employment rights. This might include an agreement to give a reference, redundancy pay arrangements, the reason for leaving, an agreement not to criticise an employer or an employee, returning property and the financial arrangements.

Why do I need legal advice?

Settlement agreements are not legally enforceable unless they meet certain requirements, one being that the employee has received independent legal advice on the terms. Employees have to receive the advice before signing the agreement to make sure they understand the terms of the agreement and the effect this has on bringing a claim against the employer.

What rights am I waiving by signing the settlement agreement?

Employees who choose to sign a settlement agreement will normally be asked to give up specific legal claims that they have, and these can include:

  • Statutory rights; the right not to be unfairly dismissed, the right to a statutory redundancy payment, maternity and paternity rights as well as the right not to be discriminated against etc.;
  • Contractual rights because of what has been agreed between an employer and an employee. Most of the time now, these rights are set out in a written document, but this is not always the case and these rights can also include things agreed in discussion with an employer; for example a bonus payment or a higher rate of pay; and
  • Other rights; for example in respect of injuries or ill health.

Do I have to sign the settlement agreement?

No. An employee has a choice whether to enter into a settlement agreement or not.  It is a voluntary agreement. The advice an employee receives should help them decide whether entering into the agreement is the right decision to take.

I am not happy with the deal offered. Can I negotiate?

Yes. If you feel that what has been offered is not acceptable to you then you can seek to negotiate a different arrangement.

If an employee has a good relationship with an employer, it can quite often be sensible to have a discussion directly with an employer as a first step, but an employee may well want to get advice from a solicitor before telling an employer whether they are happy with the amount or the terms offered.

Where an employee doesn’t feel they can approach an employer directly, then a solicitor can do this.  An employee can seek to agree different terms, for example a fuller reference, an agreement not to criticise the employee, the leaving date as well as the financial arrangements. 

Do I have to pay tax on payments made under a settlement agreement?

The answer is, that it depends on what payments are being made. Holiday pay and contractual notice pay will be subject to tax but in some circumstances, genuine termination payments up to £30,000 can be paid without paying tax.

As to whether a proposed payment can properly be categorised as tax free depends on a variety of factors and recent changes in the law mean that where an individual has not worked their correct notice period, all or a portion of a termination payment might still have to be taxed (PENP).

What about non-disclosure agreements (NDAs)

There have been lots of references in the press to NDAs (employment solicitors would normally refer to confidentiality or non-derogatory comments clauses or provisions). 
These are the parts of an agreement whereby an employer (or an employee) might want to try to stop the disclosure of information, or one party openly criticising the other.  These arrangements have come in for a lot of criticism and steps are being taken to make sure that employees are not prevented from talking about important elements as part of therapy or counselling, or where ordered to do so by a court or tribunal.

How much does it cost to get advice on an agreement?

Most employers will offer to make a contribution towards the costs of getting legal advice but the contribution will only normally be paid if the employee goes ahead and signs the agreement.

Fees for providing advice are generally a minimum of £500 plus VAT but can be higher for example where an employer wants an employee to sign two agreements with a period of time in between, or if there are share option or other employee benefits to be taken into account.

What happens next?

Once an employee has been given a draft settlement agreement, they will need to identify an independent employment solicitor (or some people do an on-line search for a ‘settlement agreement solicitor’) to provide the necessary advice.

Can Brachers help?

The Brachers employment team has extensive experience of advising employees on settlement agreements and on how to negotiate exits from employment.  We can provide advice before a settlement offer is made (or on how to ask an employer for one) including advice on legal rights and how to negotiate a deal.

We are able to explain the implications of settlement agreement terms including those relating to employee benefits entitlements, including share options and retention plan entitlements. If you feel the offer is not in your best interests, Brachers can negotiate with your employer on your behalf and draft changes to the documentation to protect your interests.

Please contact a member of the employment team if you would like advice on the terms of a settlement agreement.