Settlement Agreement Blog – Q&A’s

All you need to know about settlement agreements

A settlement agreement, also formally and still sometimes known as a compromise agreement, is a documented agreement between an employer and employee can agree terms upon which employment will end or claims can be settled.  The agreement prevents an employee commencing a claim against their employer in the employment tribunal. The right to bring a claim against the employer is waived normally in return of payment from the employer to the employee.

Without prejudice conversations on settlement agreements

Usually when an employer wants to exit an employee, or an employee would like to leave the business and there is an outstanding dispute, a without prejudice conversation is entered into. Without prejudice means that these discussions are ‘off the record’ and cannot be relied upon by either party in future litigation for example should tribunal proceedings commence later down the line.  This allows the parties to speak more freely and hopefully to achieve a mutually agreeable outcome.

Adviser’s certificate – what is one?

The waiving of the right to bring a claim against your employer is a big right to waive. A potential claim against an employer could be worth thousands of pounds so an employee needs to know the impact of the agreement and to understand all the terms. Due to this, a critical part of the agreement is the adviser’s certificate. A solicitor or relevant advisor will need to sign this to show that they have advised you as to the impact of the settlement agreement and the terms involved and that you have understood this. This certificate will also need to confirm that the solicitor has in place indemnity insurance so that if they have been poorly advised, you can claim against the solicitor and not your employer.

What’s normally included in the settlement agreement?

Payments

The most important part of the agreement (to the employee) will be the amount the employer is offering for them to waive their rights. Payments usually include

  1. Payments in lieu of notice (PILON),
  2. Payments for accrued but untaken holidays, expenses
  3. An ex-gratia payment as compensation for loss of employment and/or a thank you for their service.
  4. Payments in relation to ongoing confidentiality obligations or restraints of trade

The Ex-gratia payment can also be known as a ‘golden handshake’. The first £30,000 of a genuine payment for compensation for loss of office is tax-free to the employee. Any payments above this will be taxed in the usual way but an employee does have the option in most cases for the excess to be paid into a pension to make this tax-efficient.

What happens to this payment is up to the employee and is dependent on their personal circumstances at the time.

Post-Termination Restrictions

Employers will not want those in a senior role or employees who have had access confidential information to take this information and use it for a competitor, poach employees or set up shop themselves. An employer will require the employee to agree to post-termination restrictions to protect their business interest, but these cannot be drafted too widely, and they can also include an amount to pay the employee in return for complying with the restrictions.

Other Clauses within a settlement agreement

The agreement will set out details such as your leaving date or Termination Date, an agreed-upon reference, an agreed leaving announcement internal and external. They can also be drafted to include things such as:

  • outplacements services – if you have worked for a company for a long time, these can provide training on the skills to secure new employment;
  • A tax indemnity;
  • Post-employment assistance: the company may require you to be a witness at an employment tribunal, the clause would detail what they can ask of you and what they would pay you for your time;
  • Non derogatory comments and confidentiality obligations (normally reciprocal).

Legal Fees within a settlement agreement

An employer will usually make a contribution for the employee’s legal fees, the usual contribution is around £500 plus VAT, but you can ask your employer to contribute more if you wish.

If you have been offered a settlement agreement or wish to speak to a member of the team at Consilia about an agreement, please call us on 0113 322 9222 for a free half-hour consultation. Alternatively, you can email us at enquiries@consilialegal.co.uk

Read our other blogs on settlement agreements

7 steps to a successful settlement agreement

The employment law team at Consilia Legal is headed up by Marie Walsh, a leading, award-winning employment law solicitor in Leeds. The employment law team at Consilia are regularly praised in reviews for their efficiency, professionalism, tenacity, and determination. Read some of their outstanding google reviews on employment law matters.

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