What is a settlement agreement (previously known as a compromise agreement)?
Legally binding contracts normally used to end the employment relationship on agreed terms.
The main feature is that they waive your right to make a claim against your employer (a clean break). They usually include some form of payment by your employer.
Settlement agreements are usually proposed by an employer who will be keen to prevent legal action being taken by you and/or to avoid the necessity of lengthy internal processes such as disciplinary, performance or redundancy.
They are voluntary, so that you do not have to accept the terms that are proposed
Legal requirements for a binding settlement agreement
- The agreement must be in writing.
- It must relate to a particular complaint or proceedings, and so just saying that the agreement is in “full and final settlement of all claims” will not bind the parties
- You must receive advice from a relevant independent adviser, such as a solicitor, who is identified within the agreement.
- The adviser must have appropriate professional indemnity insurance.
- The agreement must state that the legal conditions regulating settlement agreement has been satisfied.
How much time should I be provided to consider the offer?
There is an ACAS code of practice that states that employees should be given “a reasonable period of time to consider the proposed settlement agreement”. As a general rule, a minimum period of 10 calendar days should be allowed to consider the proposed formal written terms of a settlement agreement and to receive independent advice, unless the parties agree otherwise
How do I know if the amount of money being offered is fair?
We can assess whether you have a strong case, were you to take your case to an employment tribunal. We can calculate what you would get if you were to pursue a claim compared to what you are being offered.
It the offer is satisfactory, or if you instruct us to proceed despite the fact you could obtain more in an employment tribunal, we will sign your Settlement Agreement to ensure a speedy resolution.
If our advice is that the offer is insufficient and you instruct us to obtain as much money as possible, we can negotiate on your behalf. We may advise you to raise a grievance to protect your position or, where appropriate, to appeal the outcome of a disciplinary sanction.
Negotiating the terms of a settlement agreement
As with any negotiation, the strength of your bargaining position is the most important consideration.
The following factors will be relevant when considering your bargaining position:
- What is the likelihood that you win your case if you issue employment tribunal proceedings?
- Are you be prepared to issue proceedings in the employment tribunal?
- Is your employer concerned about the possible reputational damage of legal proceedings?
- Are you likely to be receive far greater compensation if you are successful in employment tribunal proceedings?
- What is likely to happen if you decide not to take the offer?
Will I need to pay tax on the money that is offered?
Termination payments: Payments of up to £30 000, to compensate you for termination, are not subject to tax or National Insurance deductions..
Notice: The Settlement Agreement should include details about your notice payment if it is not going to be worked. Any payment in lieu of working a period of notice must always be subject to tax and National Insurance. It should not be added to the termination payment to avoid the payment of tax.
Other: Accrued but untaken holiday pay and any bonus or commission payments that will be paid should be taxed as earnings.
Benefits during notice
If you are receiving a payment in lieu of notice (ie not working your notice) then you will want to know whether your employer should pay you for the benefits that you would have received had you worked your notice. This may include pension contributions, private medical and car allowance. Whether or not there is a contractual entitlement to these benefits will depend on what is covered in your contract of employment.
Will I get a reference?
Most settlement agreements include a form of reference, but unfortunately these are usually very basic and sometimes referred to as ‘tombstone references’. They will include your start and end date and the position you held at the point of termination. A better reference can sometimes be negotiated but this is unlikely if your employer has concerns about performance or conduct.
Post employment restrictions
Restrictive covenant
The Settlement Agreement may reaffirm post-termination restrictive covenants that are contained within your contract of employment. If the restrictions impact your ability to find new work then it will be even more important to ensure that the compensation payment is fair.
Confidentiality
Confidentiality is likely to be extremely important for your employer. They will not, however, be able to prevent you from ‘blowing the whistle’, reporting wrongdoing to a regulator or reporting a criminal offence.
Your employer should not restrict you from speaking to those closest to you, such as a spouse or immediate family or from telling future employers about the circumstances of your termination.
The agreement will usually prevent you from making derogatory comments against your employer and we will usually request that this type of clause is reciprocated by your employer, so that they are prevented from making derogatory comments about you.
It is important to ensure that no inappropriate comments are made of a social media. To do so may impact in terms of the settlement agreement and your entitlement to the termination payment.
How much will it cost?
Your employer should expect to pay a contribution towards your legal fees of between £350 and £500 (plus VAT). This is likely to cover all your legal fees in a straightforward matter. We will never charge you for advice provided in respect of the settlement agreement. We will always cover our fees by seeking payment from your employer rather than from you.
If you require advice in addition to the terms of the settlement agreement then this will always be discussed with you before work is undertaken and costs are incurred.
When will you receive your money?
Once all parties have signed a Settlement Agreement, compensation is usually paid within 7-28 days.
