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Reaching a settlement agreement with your employer

If you have been offered a settlement agreement it’s essential to get prompt expert advice - you may be facing redundancy, have been unfairly dismissed or discriminated against, or are finding yourself in a dispute with your employer.

Reaching a deal which is right for you and looks after your financial and reputational interests is key and here we look at what you can expect during the process. 

With Brexit on the horizon, many international companies which have previously been headquartered in London may be considering their position. Furthermore the financial sector and banks face increasing pressure to streamline their businesses and you may be facing re-organisations which can lead to redundancies and changing of focus and roles. Deciding whether or not to accept a settlement agreement if you are facing the termination of your employment can be daunting especially at what is typically a stressful time. 

What is a settlement agreement?

It is a legal document which sets out the full terms of a settlement between an employer and employee (formerly known as compromise agreements). This may be offered if you have brought a complaint that your employer and you agree to settle, or as part of enhanced terms on redundancy or if things aren’t working out between employer and employee and everyone agrees it is for the best to reach a deal. It is important you are content with the deal and that the documentation reflects the deal agreed in principle because the way that the agreement works is that you sign away your rights to bring a claim against your employer. The terms should be agreed by both you and your employer, and you are required to obtain independent legal advice on these as part of the legal formalities.   

What is included in a settlement agreement?

There are very specific legal requirements not least because of the implications of signing away your rights. It must be in writing and must relate to the particular complaint that has led to your reason for leaving. It must be signed by the employee and confirm that the employee has received independent legal advice from a solicitor. The agreement must show that all regulatory requirements have been satisfied. Most cover every possible type of claim you could bring against your employer which means that you surrender your rights to bring statutory and contractual claims and claims for personal injury. Your solicitor should be able to advise you on your rights and help you make an informed decision on whether to take the deal offered to you.

Do I need to see a lawyer before I agree to a settlement agreement?

Independent legal advice will help you consider why you are being offered the deal, if it is acceptable and if you have any grounds for a claim against your employer. It will also highlight any rights you are losing by signing.

Having a lawyer who can, where appropriate challenge or refine the terms being offered effectively could also help you secure a better deal including the amount of money you are being offered, making sure it is enough and that it will cover your expenses during a period of unemployment. Negotiating at this stage can remove the need for you to bring formal proceedings against your employer which can be costly, risky, complicated and time intensive. 

What are the different employment rights?

You have contractual rights which set out details such as your contract of employment, job title, holiday entitlement, notice period and other benefits. Your common law rights relate to treatment of you by your employer such as negligence. Statutory rights cover areas such as being unfairly dismissed, your right to redundancy payments, discrimination on grounds such as gender or race and the right to receive the minimum wage. 

Is a settlement agreement legally binding?

Yes, it is a legally binding document but it will not be legally effective unless signed by an employment lawyer. It is usual for the lawyer to also sign a form confirming that advice has been given and that they hold insurance that covers the risk of a claim for the advice being negligent.

How do I know if the settlement agreement is a good deal for me?

Your lawyer will be able to help you decide if it’s the right deal for you and will help you understand why you are being offered the agreement. If, on consideration, the deal is not right they will be able to negotiate on your behalf or discuss alternative options. It will be important for you to consider what your best outcome would be - employment at another employer or even competitor, best financial package to set yourself up for the future, achieving a discreet and dignified exit from the company, or a combination of all of these. The terms can include agreed references, confidentiality and reputation management. If you are a director you will need to ensure that your director duties and responsibilities are covered. 

Will I still receive my bonus if I sign a settlement agreement?

As a bonus is often discretionary it can be difficult to argue that you were contractually entitled to it but an employment lawyer would look at your earnings history and negotiate effectively on your behalf. Commission is normally contractual so you should receive the appropriate payment. For individuals on complex packages which include bonuses, deferred compensation, shares and vesting options it is important to take expert legal and financial advice to make sure that the settlement agreement values these correctly and that they are accurately recorded in your exit terms. The tax implications of a high value settlement should also be examined. It is usual for an agreement not to settle your accrued pension rights or rights in relation to latent personal injury.

Is tax deducted from a settlement agreement?

It depends – any payment made to you is classified by HMRC as post-employment notice pay (PENP) (whether or not you are required to work your notice period) and is treated as earnings and subject to tax and National Insurance contribution deductions as will be payments for accrued untaken holiday. Ex gratia payments – non contractual payments, can normally be paid without deduction of tax up to £30,000. 

What are the legal costs for a settlement agreement?

While not required by law, it is standard practice for an employer to contribute towards the cost of you taking legal advice on settlement agreement terms as long as you ultimately agree to the agreement. A contribution of up to £1,000 is not uncommon while those in more senior positions with complex packages can expect to be offered several thousand pounds. It can be worth funding additional legal fees yourself if you feel it would help you to achieve a better deal.

Most employment lawyers will be upfront about their costs and having discussed your desired objectives and their legal and practical implications will be able to give you an indication of the costs, allowing you to make informed choices.

What happens if I refuse to sign a settlement agreement?

Refusing to sign may result in the termination of your employment and you will not receive your employer’s contribution (if there is one) to your legal fees. But if you don’t sign you have the right to make your own claim against your employer, however you should be aware that you will have a time limit within which you can make your claim which is usually three months less one day.

What if I want to go and work for a competitor?

Other things to consider are confidentiality terms and post-termination restrictions. Are these necessary? Does your employer want to tie you in to abide by your existing terms not to compete?  A release from these terms can be negotiated as an addition to financial compensation.

If you have been asked to sign a settlement agreement or are facing potential redundancy, working with Tees can help remove some of the anxiety and uncertainty for you while at the same time protecting your rights. We will negotiate your settlement terms and help you to achieve the best possible outcome at, what is often, a highly stressful time. We are experienced specialist solicitors who can advise and negotiate a package which is based on your desired objectives (employment elsewhere, or at a competitor, best financial outcome, dignified exit) for you which is suitably drafted to provide you with legal protection. We are experienced in dealing with high-value and complex settlement agreements including those of CEOs, directors, senior executives and managers and our offices in Brentwood, Chelmsford, Bishop's Stortford, Cambridge, Saffron Walden and Royston are within easy access of London. We routinely advise clients further afield, including internationally. 

Our clients find that our combined service from our financial advisers at Tees and our private client team in addition to our employment specialists  meets their further needs in terms of investing any financial gain, pensions, retirement and tax planning , updating your wills, and creating or updating Powers of Attorneys. 

Call our specialist Employment Law solicitors on 0800 013 1165 for an initial chat, or fill out our enquiry form and a solicitor will get in touch.

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