Settlement agreements

They are the same thing essentially. In July 2013 the government introduced some changes including pre-termination negotiations and at the same time changed the name from compromise agreement to settlement agreement.

It means that any discussions or negotiations between the parties are confidential and “off the record” and cannot usually be used against the other party, if the negotiations break down and a claim is brought in the court or tribunal. An employer may also commence what is known as a “protected conversation” which is similar. If the employee has been placed under undue pressure or there is no genuine dispute, the discussions may not be “without prejudice” or protected from disclosure. Care should be taken in what is said in such communications, and you should seek specialist legal advice.

There is no set method to calculate an amount due under a settlement agreement. At a minimum an employee should normally be paid their notice pay (unless they have been dismissed for gross misconduct) plus any accrued but untaken holiday (if any) and any other contractual payments.

Additional compensation for loss of office will differ depending on the circumstances and facts relating to the termination of employment.  Employers will often consider length of service and what an employee could achieve if they were to take a claim to the employment tribunal.  It is not uncommon for employers to offer between one to four months’ salary on top of contractual entitlements, but there is no one size fits all.  Make sure you take legal advice.

Payments of up to £30,000, which are not made up of any notice or other contractual elements, can often be paid without any deduction of tax. However, we strongly recommend you take specialist advice from an accountant on the tax treatment of lump sums received , particularly in complex transactions involving, for instance a transfer or sale of shares, alongside leaving employment. At Tees we will work with your accountants and can provide you with specialists to assist you.

An employer would usually offer to contribute towards legal costs, although there is no legal requirement for them to do this.  The contribution will not necessarily cover all of the legal costs incurred, for example, if long negotiations are entered into with the employer, or the employee wants additional advice. In those circumstances the employee will normally be responsible for those costs unless the employer can be persuaded to pay more. 

For the settlement agreement to be legally binding the employee must take independent legal advice so that they understand the terms of the agreement and the implications of signing it.  Once it is signed by both parties it is open (that is, no longer "off the record" as part of a without prejudice negotiation) and binding.

There are certain formalities to be met, regulated by law under the Employment Rights Act. In summary, there will be some essential terms relating to the employee signing away their rights. In addition, the agreement will commonly include terms around any compensation payment to be made, agreed reference and any post-termination restrictions. Terms around confidentiality are also common but subject to limitations, for instance that employees cannot be prevented from making a “whistleblowing” protected disclosure.