This factsheet explains how to decide whether to start or continue formal disciplinary or capability procedures or whether to provide a Settlement Agreement as an alternative way to end your employment relationship. We advise how much it might cost you to settle in this way and common Settlement Agreement areas of consideration for employers.
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 proposed may remain confidential.
A Settlement Agreement is a lengthy document which provides protection for your business in relation to a number of workplace 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 at risk due to restructuring 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 cannot be used in an ordinary unfair dismissal claim unless there has been improper behaviour by the employer.
Once you have decided that you are going to discuss the possibility of offering a Settlement Agreement to an employee to terminate their employment, it is important to take professional advice beforehand. An Employment Law solicitor should be able to advise you as to how to approach the discussion, the possible outcomes and issues you may face, and the likely costs of offering a Settlement Agreement.
Whilst you do not have to allow an employee to bring a colleague or trade union official with them, it is often sensible to do so. You should also make sure that you are accompanied by another manager or an HR professional so that you have a witness if you need one.
You should ensure that your conversation with your employee is a protected one, by stating that the meeting is a protected conversation under section 111A of the Employment Rights Act, and that it is also being conducted on a Without Prejudice basis. This will ensure that the conversation won’t be part of any future legal proceedings. It is important to note that if discrimination is present, the conversation will not necessarily be protected.
A Settlement Agreement is usually used in connection with terminating employment. Employers often offer a Settlement Agreement as an alternative to both parties going through other more lengthy procedures, for example a Capability Process or a Fair Redundancy Process. This allows the employee to accept a Settlement Agreement, bringing the employment to a swift conclusion, with the employer compensating the employee for the loss of their employment.
It is important to consult with an Employment Law solicitor to establish what constitutes fair compensation, as well as to draw up the terms of the Settlement Agreement.
Whilst employers are often the ones to offer Settlement Agreements to an employee, it is possible to request one from your employer. You may want to do this in a situation where the employee feels like they are being managed out of the workplace.
One example would be if an employer was setting their employee unreasonable performance targets. Whilst in this situation it may be possible for the employee to make a claim against the employer of constructive unfair dismissal, it may be easier for the employee to request a Settlement Agreement as a mutually beneficial way of settling the dispute.
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 presented 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 a restructuring procedure.
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 restructuring 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 it 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 presented 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 provision 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 Settlement Agreement terms 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. Therefore, it is essential to hire an experienced Settlement Agreement solicitor to ensure a smooth parting of 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 present a Settlement Agreement. For example, if you present 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 provision 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 terms. Acas recommends 10 calendar days.
You may wish to provide 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 given. 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 restructuring 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 providing a Settlement Agreement. This may be presented 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.
There is no universally-accepted formula for calculating how much an employer should offer their employee in a Settlement Agreement, nor how much an employee should ask for. A Settlement Agreement is an agreement between two parties and it is in the employer and employee’s interests to reach a figure that works for both.
This is why it is important to instruct an expert Employment Law solicitor to assess the circumstances in which the Settlement Agreement is being offered, assess the relevant positions of the two parties and can negotiate the best possible deal for you.
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. In April 2018, new tax rules took effect to ensure that all payments in lieu of notice (PILONs) are subject to income tax and National Insurance contributions in full. Your solicitor will check your employee’s contract before drafting the Settlement Agreement to make sure that the sums you present to your employee are correct and tax efficient. 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 provided 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.
The precise contents of a Settlement Agreement will depend on the nature of the agreement, but generally, Settlement Agreements will cover the following things:
A settlement agreement bust be signed off by an independent legal adviser, must be in writing, and must relate to a ‘particular complaint’ or ‘particular proceedings’ regarding the nature of the situation that has led to the Settlement Agreement being offered.
Acas offer a range of Settlement Agreement letter templates that can be used depending on the nature of the situation. It can be valuable to ask an expert Employment Law solicitor to read over the letter and ensure that it is legally correct and that your discussions will be protected conversations under Section 111 of the Employment Rights Act.
Your solicitor will advise you as to a reasonable settlement for your employee in the Settlement Agreement terms. 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 an Employment 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 presenting. This will include advising as to the statutory cap on unfair dismissals.
If your employee’s solicitor advises that the money provided is insufficient, then your solicitor will advise you and negotiate on your behalf to ensure that the amounts presented are not unrealistically high.
If you have carried out all fair disciplinary/grievance procedures before providing 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.
When entering into a Settlement Agreement, the employee is required to get independent legal advice on the terms and effect of the Settlement Agreement. Whilst there is no obligation for the employer to pay for that advice, it is advised that they do so, as it is in the employer’s interests that the agreement is legally binding.
There are a number of potential pitfalls that employers can face when offering a Settlement Agreement. One such situation is when an employer misunderstands the nature of a protected discussion and considers themselves to be protected by the ‘without prejudice’ principle when they are not.
Another is when the employer does not realise that the confidentiality obligations in a Settlement Agreement only come into effect when it is signed by both parties, and that confidentiality must also be covered in the initial protected conversation. Other issues can arise when the employer fails to treat payments correctly for tax purposes.
An expert Employment Law solicitor will be able to provide specialist advice to the employer at every step in the process and ensure that these pitfalls are avoided.
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 given 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 our Employment Law Team’s hourly rate.
Once all parties have signed a Settlement Agreement, compensation is usually paid within 7 to 28 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 experienced employment solicitors and all our solicitors are specialists in Employment Law and have vast experience in providing Settlement Agreement guidance for employers. The practice will advise you fully on all the implications of providing a Settlement Agreement and will endeavour to ensure that the sum given represents a fair amount and is not unfairly inflated by the employee’s solicitor. This will enable you to deal with your employee dispute efficiently and quickly.
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