What’s in a name?
Settlement agreements in the employment context (formerly known as compromise agreements) are legally binding agreements which can settle most statutory employment law claims, including unfair dismissal. They are commonly used as a means of bringing an employment relationship to an end and settling any employment claims that an employee might have.
They will ordinarily involve some form of incentive for an employee, usually in the form of a financial sum, but can include certain other benefits, in return for the waiver of the right to bring a claim on an employee’s part.
Why would you use one?
Settlement agreements are often used to settle disputes on termination of employment. However, this is not always the reason and they are often used simply for an employer’s comfort, where an employee may not have asserted a particular statutory right and there is no dispute as such, but there is an agreed exit and an employer wishes to close off the risk of any future litigation. For example, in a redundancy situation, the handling of a consultation process can be complex and time consuming, particularly if there are large scale redundancies. It is therefore common for employers to offer enhanced packages to affected employees if they are able to do so, in return for those employees signing a settlement agreement. In addition, if an employee has accepted voluntary redundancy, with an enhanced package, an employer will ordinarily make signing a settlement agreement a condition of the voluntary offer. This will be particularly important if a full and fair consultation process does not take place as a result or is cut short for any reason. Although the redundancies may be legitimate and reasonable in all of the circumstances, a settlement agreement can give piece of mind and ensure that an individual cannot still try and bring a claim, if they were, for example, to latterly change their mind.
Settlement agreements will often be an attractive option for employers and employees as they can provide resolution and allow everyone to move on. Employees may also prefer this in comparison to a lengthy consultation process which can be emotionally draining. Confidentiality provisions ordinarily included in settlement agreements can also avoid the wider workforce being affected.
What you need…
For a settlement agreement to be valid, the following conditions must be met:
- the agreement must be in writing;
- the agreement must relate to a “particular complaint” or “particular proceedings”;
- the employee must have received legal advice from a relevant independent adviser on the terms and effect of the proposed agreement and its effect on the employee’s ability to pursue any rights before an employment tribunal;
- the independent adviser must have a current contract of insurance, or professional indemnity insurance, covering the risk of a claim against them by the employee in respect of the advice;
- the agreement must identify the adviser; and
- the agreement must state that the conditions regulating settlement agreements under the relevant statutory provisions have been satisfied.
If an agreement fails to comply with any of these requirements it will be invalid and unenforceable.
Where to start…
Settlement agreements are often used by employers where they are in dispute with an employee and are looking to settle the matter quickly and avoid costly litigation. Provided there is a recognised ‘dispute’ between the parties, raising the possibility of settlement can be done on a “without prejudice” basis. This means that the existence and contents of the negotiation will ordinarily be protected from being disclosed at court or in the Employment Tribunal if negotiations break down. When negotiating a potential settlement sum, communication should therefore be stated to be “without prejudice”.
Sometimes in litigation, it might be appropriate to rely on an earlier offer of settlement in support of a costs application in the event that negotiations fail and an employee brings a claim which is either successfully defended or the remedy awarded is less than the amount that was offered. In these circumstances, offers should be marked “without prejudice save as to costs”. Offers should also make it clear that they are subject to terms of the settlement being agreed. As such, it is also important to mark any settlement correspondence “without prejudice and subject to contract”. This will ensure there is no binding agreement until all of the terms of the settlement agreement are agreed and signed.
It is important to note that the “without prejudice” protection only applies if the communication is a genuine attempt to settle an existing dispute, and in a lot of settlement agreement discussions this will not be the case because the dispute may not yet have arisen or been brought up by the employee. To address that gap, amendments were made to the Employment Rights Act 1996 (“ERA”) in 2013 to allow for “protected conversations” to take place in pre-termination settlement negotiations. The changes, which were introduced by new section 111A of the ERA 1996, mean that employers are now able to engage in off the record conversations with employees in relation to the termination of their employment without fear of this being disclosed in the Employment Tribunal.
However, conversations are only protected in relation to unfair dismissal claims. If there is the potential for a discrimination claim, the protection under section 111A cannot be relied upon. In a worst case scenario, an employee receiving an offer to terminate their employment in return for a settlement package, could, in such circumstances, use the fact that the offer has been made as the foundation of, or part of, a discrimination and/or constructive unfair dismissal claim. Employers should therefore consider whether discussions will be protected before making an offer. That being said, it will still always be prudent to label settlement correspondence “without prejudice” and mark it as covered by s.111A ERA 1996.
The amount…
What will be acceptable to an employee will very much depend on the type of claim (if any) they could bring, the strength of the claim, and the employee’s role and contractual benefits. Consideration needs to be given to an employee’s minimum entitlement from a statutory and contractual perspective and then what can be offered as an enhanced element. There will need to be some form of incentive for an employee to waive their right to bring a claim. If an employee is not being compensated reasonably this will come to light when they receive independent legal advice and their advisor will likely advise them to negotiate a higher figure or simply not enter into the agreement.
Employers should also consider whether there are any non-financial benefits that could be offered and would be attractive to an employee. This could, for example, transferring ownership of a company phone or car, a reference, or allowing certain benefits to continue for a certain period of time post termination.
Tax implications
Employers will need to consider the structure and tax implications of any payment offered. Payments of up to £30,000 paid to the employee as compensation for the termination of employment (including redundancy payments) can be paid tax free. Payments that are due under the employment contract, such as salary, cash benefits and notice pay, will be subject to tax and National Insurance contributions. Previously the taxation of notice payments would depend on whether there was a contractual entitlement to make a payment in lieu of notice. However, now, any payment that reflects a period of unworked notice is taxable. If this is not taxed at source, then it will be due as ‘post-employment notice pay’ and a slice of any termination payment will be taxed accordingly.
Other matters covered…
As well as setting out agreed terms in relation to financial sums to be paid, settlement agreements ordinarily also set out agreed terms in relation to company property, confidentiality, confirmation of any on-going restrictive covenants and in some cases a reference so they can be useful from a commercial perspective.
The Employment team at Sintons is experienced in drafting, reviewing and advising on Settlement Agreements, as well as negotiating terms in relation to the same. If you have any questions, please contact Catherine Hope or another member of the team.
