If you are an employee who has been offered a settlement agreement (previously known as a compromise agreement) or you are an employer that needs to prepare a settlement agreement for an employee then you will need legal advice. We can ensure that the agreement accurately reflects the intentions of both parties and protect them from any possible later action or claim by either party.
In essence a Settlement Agreement is a signed contact between an employee and an employer. The terms of the agreement are usually that the employee agrees not to issue or continue proceedings against their employer and the employer agrees to pay the employee a lump sum of money.
An employer may offer an employee a Settlement Agreement for various reasons, for example they may want to avoid the potential legal costs and the time of defending a claim against them at the Employment Tribunal. Alternatively, the employer may simply want to offer a significant amount of money as a reward for the long service of an employee who they are making redundant.
The reasons for offering a Settlement Agreement differ from case to case.
However, a Settlement Agreement is only legally binding if the following conditions are satisfied:-
- The agreement is in writing,
- The agreement refers to the complaint or proceedings of the employee,
- The employee has received advice from a relevant independent adviser about the terms of the settlement and their ability to pursue any further claims,
- The employee’s adviser must have an insurance policy in force to cover the risk of a claim being made by the employee for any loss suffered. All practising solicitors have to have professional indemnity insurance.
- The agreement must identify the legal adviser,
- Finally, the agreement must state that the conditions regulating Settlement agreements under the relevant Act or Regulations are satisfied.
To make sure that you get the legal advice that you need get in touch with us today:
- Call: Ian Steel on 0113 390 7888
- Email: steel@cohencramer.co.uk
- Complete the contact box at the bottom of this page and we will get straight back to you.
Settlement agreements and the law
All employees have the right not to be unfairly dismissed and a Settlement Agreement entitles an employee to opt out of their legal rights by signing a valid Settlement Agreement. The legal position is set out in section 203 of the Employment Rights Act 1996.
Your Settlement Agreement
The terms of a Settlement Agreement are not fixed, the terms are whatever the employer and employee agree. Solicitors acting for a company may state that the wording “is a standard document and we are not changing it”. What they usually mean is that the Settlement Agreement is a standard precedent document they use for all cases and because nobody has questioned the terms before they see no reason to change it. However, if a logical explanation is presented to explain why clauses in the agreement need to be changed, an employer will usually agree to change the terms.
However, many terms are common to Settlement Agreements such as the tax indemnity clause, confidentiality agreements and the fact that the agreement is in full and final settlement of all potential employment claims are clauses that employers will not change.
There are important issues to consider and be aware of if you are offered a settlement agreement, some of which are set out below. In the circumstances it is important that you should only instruct an employment law specialist to advise you about the terms of a Settlement Agreement. We will need to see the Settlement Agreement, the contract of employment, Employee Handbook and your wage slips before advising you. Employers will agree to send me this information by email if asked. If you want to see me in person do not hesitate to contact Ian Steel on 0113 390 7888 to arrange an appointment or alternatively we should be able to refer you to an employment law solicitor local to you. Ian Steel is based in Leeds but we have access to offices in Bradford and Huddersfield and other Cities throughout the UK.
Issues to consider when reviewing a Settlement Agreement
1.£30,000 tax free payment
A common misconception is that when a Settlement Agreement includes a payment of £30,000, this can be paid tax free, regardless of what the payment is for. This is partly true but can be misleading. In summary, contractual payments such as notice pay, holiday pay or commission payments are taxable. Non contractual payments, including redundancy payments can be paid tax free up to a limit of £30,000. HM Customs and Revenue (formerly known as the Inland Revenue) set out the rules about what payments are or are not taxable. HM Customs and Revenue provide some useful guidance on the issue, for example:-
Examples of what payments are taxable can be found here
There are two important exceptions to the rule about what is, or is not taxable. Firstly, if an employer always pays a set sum of money when employees leave and this entitlement is not referred to in the contract of employment or employee Handbook, the payment may still be taxable. For example, in a case where we acted for an employee who was aware that there was a verbal policy whereby all senior managers were paid a set sum of money when leaving under a Settlement Agreement, we advised that the money may be taxable It was even suggested that there was a written policy document. If such a policy existed the payment may be regarded as a taxable payment by HM Customs and Revenue because it was an implied term of the contract of employment.
The second possible exception is when a payment is offered several months before the employment ends. For example, we are sometimes asked to advise clients about Settlement Agreements 12 months prior to the employment ending. Given that a contract of employment can be varied verbally or in writing, we advised that if HM Customs and Revenue examined the terms of the Settlement Agreement and saw that an agreement had been reached 12 months prior to an employee’s employment ending, H M Customs and Revenue may conclude that the offer was in effect a pay rise and therefore a taxable contractual payment.
2. Bargaining Position to increase any payment offered.
Clients often say that they don’t want to be greedy, but they do want to make sure that they are paid what they are entitled to. However, it is rarely a case of being greedy, after all, the employee may be losing a secure job during the current recession where secure employment is harder to get and any employment obtained is likely to be at a lower salary.
Negotiating the terms of a Settlement Agreement is usually an issue of bargaining power. Bargaining power is often determined by balancing what you are contractually entitled to, what potential employment or contractual claims you have and what you and your employer are likely to do if you reject the offer. When advising clients about Settlement Agreements I always calculate what the employee is contractually entitled to. To calculate this I need to see the contract of employment, Employee Handbook and details of the wage slips. If clients do not have these, their employer will usually agree to provide them by email.
In some cases it is necessary to calculate the employee’s redundancy entitlement. This can be calculated using an online calculator http://www.direct.gov.uk/en/Diol1/DoItOnline/DG_4017972
Any good employment law solicitor will be able to advise you about what potential claims you may have. There is a list of potential claims that can be made in the Employment Tribunal, albeit it in a fairly unfriendly format. http://www.employmenttribunals.gov.uk/FormsGuidance/jurisdictionList.htm.
In additional to the potential claims you may have, negotiating points may include asking for an additional payment to cover holiday pay that they would have received if they had worked their notice period. We may ask for any additional redundancy pay the employee would have received if they had worked their notice period and any potential bonus payments they would have received during their notice. Employers are usually receptive to a well constructed argument about why someone should be paid more than was originally offered.
We always advise clients that an employer can withdraw a Settlement Agreement at any time. However, this is rare.
3. Payments in lieu of notice (Pilon matters)
All contracts of employment should include clauses relating to notice periods. When a Settlement Agreement is being entered into, your employer may agree to pay you your notice monies but agree that you can leave straight away. This is referred to as a payment in lieu of working your notice period. If your contract of employment does not include a payment in lieu of notice clause, you are not contractually entitled to your notice pay without having to work. This makes the payment in lieu of notice a non contractual and therefore a non taxable payment.
4. Household insurance policies
You should check your household insurance policy to see if you are covered for mortgage payments in the event that you are made redundant. If your insurance policy covers you in the event that you are made redundant and it is important that this is reflected in the Settlement Agreement. If relevant, we make the employer aware that they are likely to receive a form from the insurance company to complete about why your employment ended. Our experience is that the insurance company will ask the employer to tick a box to explain why your employment ended. One form we have seen that was sent by the insurance company had separate boxes for redundancy and Settlement Agreements. The concern was that the insurance policy would not pay out if the employer ticked the Settlement Agreement box because a Settlement Agreement is effectively a resignation based on agreed terms. The employer agreed to complete the form indicating that the reason was redundancy, which was achieved by way of a Settlement Agreement. In the circumstances, the insurance company paid my client’s mortgage for the agreed term under the policy.
While based in Leeds we can see client’s throughout the country.
To make sure that you get the legal advice that you need get in touch with us today:
- Call: Ian Steel on 0113 390 7888
- Email: steel@cohencramer.co.uk
- Complete the contact box at the bottom of this page and we will get straight back to you.
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