This factsheet explains how a Settlement Agreement works and what happens when you are offered one by your employer.
A Settlement Agreement (formerly known as a Compromise Agreement) is a legally binding agreement between you and your employer. This usually provides for a severance payment by the employer in return for your agreement not to pursue any claims in a Tribunal or a Court. The employer will usually require you to keep the terms, for example the amount and the surrounding circumstances of your contract’s termination, confidential.
An agreement whereby you waive your rights to bring an employment claim can only be recognised in law if a solicitor or certified trade union or adviser signs it off.
A specialist employment solicitor will advise you on the merits of your claim and the amount of money you would be likely to receive at an Employment Tribunal.
A specialist employment law solicitor will also identify any discrimination against you of which you might not be aware. For example, you might be disabled and protected by the Equality Act and therefore entitled to reasonable adjustments before any dismissal can take place. In these cases, there will not only be an unfair dismissal claim, but also an amount awarded for injury to feelings.
Employers will offer a Settlement Agreement when they want to terminate a contract on terms mutually agreed with you. This is so that there is a clean break with no opportunity for you to take them to court or a tribunal for more money.
There is a range of scenarios in which Settlement Agreements are used. They usually apply where the employer does not want to follow what could be a long, drawn-out process, such as a performance review or a full redundancy process, before being able to terminate. Also, where you already have issues about discrimination or have raised a grievance, the employer may want to circumvent a claim for constructive dismissal and/or discrimination.
Prior to 29th July 2013, Settlement Agreements were known as Compromise Agreements.
In practice, there is little difference between a Compromise Agreement and a Settlement Agreement. However, under the terms of the new Settlement Agreements, discussions about the offer of such an Agreement can not be used in an ordinary unfair dismissal claim unless there has been improper behaviour by the employer.
If you have a potential claim for any type of discrimination due to a “protected characteristic” – such as age, disability, maternity, pregnancy, race, religion or belief, sex, or sexual orientation – or claims for automatic unfair dismissal such as whistleblowing or for raising health and safety issues then these “off the record” conversations and documents can be brought to the attention of an Employment Tribunal.
For example, if you are offered a Settlement Agreement because you informed your employer that you were pregnant, or because you are an older employee who has reached a certain age and your employer is trying to encourage you to retire, then all of your discussions would be admissible at Tribunal, however much your employer insisted they were “off the record” or “without prejudice”. Some HR Managers have also been referring to this as “protected conversations” when this status rarely exists and only in a very narrow set of circumstances.
In addition, if there has been “improper conduct” by your employer, then they cannot keep these offers and negotiations secret. Improper conduct covers a number of situations, including putting undue pressure on you. Examples of this are all forms of bullying, harassment and intimidation, all forms of victimisation, and not giving a reasonable period of time for you to consider whether to accept the offer of a Settlement Agreement – Acas recommends 10 calendar days.
Threatening dismissal before any form of disciplinary process has begun, if the Settlement Agreement is rejected, also constitutes improper behaviour and will be disclosable to a Tribunal. The likelihood is that you will want to raise a grievance about this type of behaviour which, if not upheld, may result in your resigning and claiming constructive unfair dismissal.
The Settlement Agreement will state the full breakdown of payments due to you and also whether any sums will be paid free of tax. A payment of up to £30,000 compensation can be paid without tax being deducted if it is an ex-gratia payment (compensatory rather than contractual payment).
The Settlement Agreement will deal with your notice payment if this is not going to be worked. If you have no contract or your contract does not contain a provision that refers to your employer being able to make a payment in lieu of notice (PILON), then your employer could pay your notice as a gross amount. There is no additional cost to your employer as this money would otherwise have been paid to HM Revenue and Customs.
It is important that your solicitor checks your contract to make sure you receive the maximum sum in the most tax efficient way possible. Also, as it is usual for you to provide your employer with a tax indemnity in the Settlement Agreement, you need to be advised as to what tax you should expect to pay if HMRC challenges the payments made under this agreement.
If you are due bonuses or commission then the amounts owed should be set out in the agreement. A solicitor should check your contract to ensure all contractual bonuses and commission are paid in full.
Your solicitor will need to advise you in relation to ongoing loss of pension, particularly if you have a final salary pension. Pension contributions should continue during your notice period unless your contract says otherwise. If an arrangement is reached with your employer for a lump sum to be paid into your pension as part of the settlement terms then you may be able to benefit from this being paid free of tax.
Some schemes will allow you to remain in them for the period up to which your employer has paid. Other schemes will require this benefit to terminate on the last day of employment. However, it is always a good idea to find out if the insurer will offer enhanced terms if you stay in the scheme as an individual once your contract has terminated, if there is no break. This can be explored prior to the termination date.
Your solicitor should look at the different sums offered to you in your Settlement Agreement and advise you if it is a good deal. This will be based on the facts relating to the employer’s wish to terminate your contract. Your solicitor should provide you with advice as to whether you have a strong claim were you to take your case to Tribunal or a Court and calculate what you would get if you were to pursue your claim in a Tribunal compared to what you are being offered in the Settlement Agreement.
Where the amounts offered are satisfactory, or where you instruct the solicitor to proceed despite the fact you could obtain more in a Tribunal or Court, your solicitor will sign off the Settlement Agreement to ensure a speedy settlement of the sums offered.
If your solicitor advises that the money offered is insufficient and you instruct them to obtain as much money as possible, they will negotiate on your behalf to ensure a fair sum of money is paid. This may mean the solicitor helping you to raise a grievance. It is important to lodge a formal written complaint to protect your position if there have been acts of discrimination. If a dismissal has taken place, your solicitor will assist with your appeal.
Where you have been in dispute with your employer, it is a good idea to ask that an agreed reference is attached to the Settlement Agreement with a clause that the employer cannot derogate from this agreed reference.
The Settlement Agreement may reaffirm post-termination restrictive covenants in your contract. Your solicitor should check your employer has not increased their scope. When a Settlement Agreement is offered because there has been a serious breach of contract, a solicitor should advise whether your employer can still enforce the original restrictive covenants. The value of the restrictive covenants to your employer will also help a solicitor assess the fairness of the amounts offered in your Settlement Agreement.
The confidentiality clause is an extremely important part of the Settlement Agreement for your employer. However, sometimes the scope needs to be reduced to allow you to speak to those closest to you, such as a spouse or immediate family or to be able to tell future employers about the circumstances of your departure.
There may also be clauses preventing you from making derogatory comments against your employer. These can be changed to be mutual clauses, stopping your employer from denigrating you.
Your employer should expect to pay a contribution towards your legal fees of between £350 and £500 (plus VAT) depending on the complexity and breadth of the issues. This is likely to cover all your legal fees in a straightforward matter. In some cases, your employer may pay up to £1,500, particularly if there are complicated post-termination covenants or a second signing is required where you are working your notice.
We always try to cover our fees by seeking payment from your employer rather than from you.
In a situation where you are being offered insufficient compensation sums, Martin Searle Solicitors offers the following funding alternatives:
Once all parties have signed a Settlement Agreement, compensation is usually paid within 7-21 days. However, certain payments will be made through the payroll on the usual payroll date such as outstanding salary and accrued holiday and bonuses or commission payments.
We are an experienced employment team where all solicitors are specialists in employment law. We will advise you fully on all the implications of signing the Settlement Agreement and will endeavour to ensure you obtain a sum that represents the strength of your potential claims together with a reference.