This factsheet explains how to decide whether to continue with formal capability or disciplinary proceedings or whether to offer termination by using a Settlement Agreement, how much it might cost you to settle in this way and common Settlement Agreements pitfalls
A Settlement Agreement (formerly known as a Compromise Agreement) is a legally binding agreement between you and your employee. It is usual for you to provide a severance payment in return for your employee’s agreement not to pursue any claims in a Tribunal or a Court. However, Settlement Agreements can also be used to reach a final conclusion to a workplace issue which does not result in the end of the employment relationship. For example, resolving a dispute over holiday pay.
The benefit of using a Settlement Agreement is that the circumstances leading to your employee’s contract being terminated and/or the terms and payment offered may remain confidential if your employee could only bring an ordinary unfair dismissal claim.
A Settlement Agreement is a lengthy document which provides protection in relation to a number of scenarios. These range from preventing your employee from making disparaging remarks to reaffirming their post-termination covenants.
Once the Settlement Agreement has been signed, you will also have peace of mind that your employee will not be able to bring any claims against you in a Tribunal or Court unless you have misrepresented the reasons for termination. An example of this is if you have advised an employee that their job is redundant when this is not really the case.
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.
Your employee may turn down a Settlement Agreement on the basis that this is not the way they wish to deal with the termination of their contract. They may also turn it down if the Settlement Agreement amounts on offer are insufficient.
The safest way to proceed with a Settlement Agreement is where your employee has made their own decision that this would be the best outcome. If the Settlement Agreement is your suggestion, then you must be careful to ensure that your employee is given a range of options. These include placing them on a performance review or going through the redundancy procedures.
Avoid situations where your employee may seek to argue that they were given no choice but to sign the Settlement Agreement as their dismissal was a foregone conclusion. As previously mentioned, ‘without prejudice’ correspondence (such as a Settlement Agreement letter) and any relevant off-the-record conversations could be used to illustrate that a later dismissal is unfair or that this treatment is part of a series of acts of discrimination.
Where a performance review, disciplinary hearing or redundancy procedure has not already started or been completed, you need to make clear that the process will commence or continue while negotiations are taking place regarding the Settlement Agreement. Make clear they will only stop when an agreement has been reached and it has been signed by both parties.
If there is the potential for your employee to make any type of discrimination claim due to a “protected characteristic”, or any claims for automatic unfair dismissal due, for instance, to raising health and safety issues or whistleblowing, then the details of such “off the record” conversations you may have had with your employee, and any relating documents, could be shown to an Employment Tribunal.
For example, if you offered a Settlement Agreement to an older employee in order to encourage them to retire, or to an employee who told you she was pregnant, then all of your discussions would be admissible at Tribunal if they pursued a discrimination claim.
Some HR Managers have been calling the conversations surrounding the offering of a Settlement Agreement “protected conversations” when this status rarely exists and only in a very narrow set of circumstances.
These conversations will also be part of the evidence used against you at Tribunal if you have been guilty of “improper conduct”. Improper conduct covers a number of situations, including placing undue pressure on your employee, such as:
If your employee rejects your offer of a Settlement Agreement and you threaten to dismiss them prior to the disciplinary process, this will constitute improper behaviour and will almost certainly result in this evidence being used against you at an Employment Tribunal. In this situation, your employee is entitled to raise a grievance about your behaviour on the basis that you have caused trust and confidence to break down. If not upheld, this could result in the resignation of your employee and a subsequent claim for constructive unfair dismissal.
Settlement Agreements can be offered to anyone who may be able to bring a claim in the Employment Tribunal. For instance, a worker who has a complaint about holiday pay or an unsuccessful job applicant who feels they were discriminated against at a job interview.
In some situations, an employee may ask for a clean break and suggest using a Settlement Agreement. This is usually when the relationship of trust and confidence has broken down. An example would be where their grievance has not been upheld or you have recently disciplined an employee and they are unhappy with the penalty. You need to consider whether this would be beneficial for your business but you do not have to accept.
Each potential dismissal will have its own set of difficult issues. Although Acas provide a template Settlement Agreement, it is your solicitor’s duty to draft a Settlement Agreement that takes into consideration the individual circumstances in relation to each termination. This ensures a smooth parting of the ways while reducing the risk of an ongoing dispute or litigation.
Your employee can only waive their rights to bring an employment claim which is recognised in law if they have their own solicitor or a certified trade union or adviser to sign off the Settlement Agreement.
There are situations where it would be dangerous to offer a Settlement Agreement. For example, if you offer one prematurely which your employee would consider to be “out of the blue” because if your employee refuses to accept it, the relationship of trust and confidence is likely to have been severely eroded. You risk all off-the-record discussions and ‘without prejudice’ correspondence concerning the Settlement Agreement being raised in a formal grievance against the company. You also risk this ‘without prejudice’ documentation being presented to a Tribunal or Court. Settlement Agreements will only guarantee “secret” or “protected” conversations in a narrow set of circumstances, where your employee could only bring an ordinary unfair dismissal claim against your company. If your employee alleges that the offering of a Settlement Agreement is a discriminatory act, eg the bullying of a woman employee by saying “take this or else”, then these conversations and documents will not have this protection. Also, there are many other types of claims which would result in an automatic unfair dismissal claim such as whistleblowing or reporting a health and safety issue. For more information, you can refer to the Acas Guidance on Settlement Agreements. This also sets out examples of inappropriate behaviour which would entitle an employee to refer to the conversations and any supporting documents. For example, using undue pressure by not giving the employee sufficient time to consider the offer. Acas recommends 10 calendar days.
You may wish to offer a Settlement Agreement in a situation where you have mutually agreed severance terms with your employee. The Settlement Agreement and the amounts involved will provide a clean break with no opportunity for your employee to take you to Court or a Tribunal for more money.
In addition, there are a wide range of scenarios in which Settlement Agreements might be offered. These include situations where you might not want to follow a potentially long, drawn-out process, such as a full performance/capability review or a full redundancy process, before being able to terminate. However, we would recommend that you have at least started off the process by advising your employee that they are being placed on a performance review, or that their job is at risk.
Where there are ongoing issues such as alleged acts of discrimination or where your employee has raised a grievance which you have not felt able to uphold, you may feel that trust and confidence has completely broken down. It may be in everyone’s interest for there to be a termination on mutually agreeable terms. It is advisable that you take legal advice before offering a Settlement Agreement. This may be offered either face to face or using a Settlement Agreement letter in these types of situations to ensure that this does not expose your company to an increased risk of litigation.
The Settlement Agreement will state the full breakdown of payment amounts due to the employee 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). See also Tax on Settlement Agreements Factsheet.
The Settlement Agreement will deal with your employee’s notice payment if it is not going to be worked. If you have not provided them with a contract or their contract does not contain a provision that refers to you being able to make a payment in lieu of notice (PILON), then you could pay their notice as a gross amount. There is no additional cost to you as this money would otherwise have been paid to HM Revenue and Customs.
Your solicitor will check your employee’s contract before drafting the Settlement Agreement to make sure that the sums you offer to your employee are set out in the most tax efficient way possible. As the Settlement Agreement requires your employee to provide you with a tax indemnity, the sums offered need to accord with tax law.
If your employee is due bonuses or commission then the amounts owed should be set out in the Settlement Agreement. Your solicitor should check your employee’s contract to ensure all contractual bonuses and commission are paid in full. However, if the contract refers to discretionary bonuses your solicitor will advise you if there is a legal obligation to pay additional bonuses and whether they need to be pro-rated to reflect the termination date.
Your solicitor will tell you if you have a contractual obligation to continue to pay company pension contributions, particularly during the notice period if it is to be paid in lieu. You may be able to reach an agreement with your employee in relation to a lump sum of money being paid directly into their pension as part of the overall settlement. Your employee could then benefit from this being treated as a further tax-free payment, subject to the terms of the pension scheme.
Some schemes allow your employee to remain in the company scheme for the period up to which you have paid. Other schemes require this benefit to terminate on the last day of employment. However, it is always a good idea to advise your employee to approach the insurer direct to find out whether enhanced terms will be offered if the individual stays in the scheme once their contract has terminated, if there is no break. Your employee can explore this before the termination date.
Your solicitor will advise you as to a fair settlement sum to offer your employee in the Settlement Agreement. How much this is will depend on the surrounding circumstances leading to your wish to terminate, the terms in your employee’s contract and any potential claims that your employee may have against you.
Your solicitor will tell you if your employee would have a strong claim against you were they to take their case to a Tribunal or a Court. They will calculate how much your employee might get if they were to pursue their claim in a Tribunal compared to the Settlement Agreement amounts you are offering. This will include advising as to the statutory cap on unfair dismissals.
If your employee’s solicitor advises that the money offered is insufficient, then your solicitor will advise you and negotiate on your behalf to ensure that the amounts offered are not unrealistically high.
If you have carried out all fair disciplinary/grievance procedures before offering the Settlement Agreement, then you are in a much better position to withdraw the Settlement Agreement if the sums that your employee’s solicitor are demanding are unrealistic. This is why you should seek specialist employment legal advice prior to embarking on the Settlement Agreement route.
There is no duty to provide any reference to an employee except in certain sectors of activity such as the financial services sector. However, the reference provided must ‘in substance be true, accurate and fair’. You have a duty of care not only to your ex employee but also to future employers. Your solicitor can provide you with guidance on this issue particularly where there have been performance issues prior to termination.
The Settlement Agreement should reaffirm post-termination restrictive covenants in your employee’s contract to ensure that your business is protected. Your solicitor will check your employee’s contract and ensure that enforceable covenants are included in the Settlement Agreement. When a Settlement Agreement is offered because you have seriously breached a contract, your employee’s solicitor may advise that the restrictive covenants have ‘fallen away’. Reintroducing the covenants into the Settlement Agreement will ensure that you have protection, particularly where a small additional amount of consideration (money) is provided for your employee in reaffirming their post-termination covenants.
The confidentiality clause is an extremely important part of the Settlement Agreement. Usually it is the employer who is most interested in this but in certain circumstances the employee will also require that there is a mutual obligation for the employer to keep confidentiality. Where your employee has been speaking to other people, then you may need to reduce the scope so that it allows them to speak to their spouse or immediate family. As an employer, you will need to be careful not to promise confidentiality where you have little control over third parties or employees and where you can only use your best endeavours.
There may also be clauses preventing your employee from making derogatory comments against you. Sometimes their solicitor will require that these are changed to mutual clauses, which may be in the interests of both parties where there has been a particularly difficult termination.
Solicitors’ fees vary. Martin Searle Solicitors’ fees for advice on a well-drafted and mutually beneficial Settlement Agreement are usually between £500 to £1,500 (plus VAT). The amount will usually depend on the complexity of the payments in relation to tax rules and the requirements of the business. In addition, you will usually be expected to pay a contribution towards your employee’s legal fees which usually ranges from £350 plus VAT to £500 plus VAT. We also provide ad hoc advice in relation to fair compensatory payments and whether you have the benefit of a “secret” or “protected” conversation, charged at an hourly rate.
Once all parties have signed a Settlement Agreement, compensation is usually paid within 7 to 21 days. However, it is usual to make certain payments 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 and all our solicitors are specialists in Employment Law. The practice will advise you fully on all the implications of offering a Settlement Agreement and will endeavour to ensure that the sum offered represents a fair amount and is not unfairly inflated by the employee’s solicitor.
Martin Searle Solicitors is the trading name of ms solicitors ltd, which is authorised and regulated by the Solicitors Regulation Authority, and is registered in England under company number 05067303.© 2021