Settlement agreements tend to come up when an employer wants to discuss with an employee about them leaving on mutually agreeable terms. It avoids the business being required to go through the process of performance management and disciplinary procedures.
The process involves a protected conversation between the two parties where the settlement agreement is offered to the employee.
Here’s our essential guide as Partner and Head of Employment, Ben Doherty answers the most asked questions on this topic.
What is a reasonable settlement agreement?
A reasonable settlement will depend on the individual circumstances of your case. If you have been with your current employer for a long time, you are likely to receive a lot more than somebody with short service.
As a rule of thumb if all the employer is offering under the agreement is your contractual right to notice and holidays plus a sum equivalent to a statutory redundancy payment, that agreement is unlikely to be reasonable and you could ask for a larger payment.
Can a settlement agreement be changed after signing?
It is very unusual for a settlement agreement to be changed after signing although like most contracts if both parties agree to the change, then it is possible to amend the agreement.
How much should I accept in a settlement agreement?
The amount you should accept will depend on your individual circumstances. By way of example if your employer believes that you have committed an act of gross misconduct you are likely to be offered less than somebody who has long service and is being made redundant. Whether you accept that offer will depend on what evidence the employer has of your alleged misconduct.
We are very happy to discuss the value of any offer you receive without the need for you to formally instruct us and with no obligation that you will do so.
What are settlement agreement requirements?
Settlement agreements are used to remove your ability to go to the employment tribunal to enforce your statutory rights, for example your right not to be unfairly dismissed or your right not to be discriminated at work because of your sex.
Those rights are created by legislation passed by parliament (in respect of the unfair dismissal and discrimination examples used the Employment Rights Act 1996 gives you the ability to claim unfair dismissal and the Equality Act 2010 gives you the right to claim sex discrimination).
The legislation also says that you can’t contract out of the right created by the legislation unless certain conditions are met. Those conditions include that you take independent legal advice, that the agreement be in writing and that it be in respect of specific claims. There is also a requirement that the agreement says that it has complied with the legislation governing such agreements.)
Who can I tell about my settlement agreement?
Normally there is an expectation that you won’t tell anybody about the agreement until it has been signed and the agreements usually contain wording stating that you will keep “the terms and existence” of the agreement confidential but that you can tell your immediate family, professional advisers or has may be required by law.
It is also not unusual to see wording that says that you can tell a potential new employer or a recruitment agent that you were made redundant.
Can a settlement agreement be overturned?
No, not in normal circumstances. However, the agreement usually contains promises that you give to your employer. One of those promises is usually that you have not committed a fundamental breach of your contract of employment which would enable the employer to summarily dismiss you. If the employer subsequently finds out that you lied when making the promise, they may try not to pay the money due under the agreement or to recover it from you if it has already been paid. Such attempts happen very seldom.
Can a settlement agreement be tax free?
An employee is entitled to receive up to £30,000 tax free provided it is paid in consideration of loss of office.
Most agreements contain wording that provides for three categories of payments:
- the payment of notice
- the payment of accrued but untaken holiday pay and
- the payment of a "Termination Payment".
Notice pays and holiday pays must be taxed but the Termination Payment is usually tax free up to the £30,000 limit mentioned above.
Can a settlement agreement be voided?
It is very unusual to see either party try to void a settlement agreement but like any other contract it technically could happen.
If either party breaches the terms of the agreement, the party not in breach is able to sue for breach of contract. By way of example if the employer does not pay the money due under the agreement, it still removes the employee’s ability to sue the employer in the Tribunal, but they can still bring a claim founded on the breach of the settlement agreement.
Can a settlement agreement be withdrawn?
No, once signed the agreement cannot be withdrawn. However, if the agreement has not been signed, the employer can withdraw their offer at any time.
Can a settlement agreement be challenged?
It is very difficult to challenge the agreement once signed. An employee can try to negotiate the amount of the offer they receive but that will depend on the individual circumstances.
Should you accept a settlement agreement?
Whether or not you should accept the offer of the settlement agreement will depend on the value of the offer and your individual circumstances. On occasion your options may be such that refusing the first offer is in your best interest as the value of the offer is much less than it should be.
If you cannot reach an agreement, it is likely that your employment will terminate in any event without the benefit of the enhanced payment due under the agreement and you can then proceed to bring a Tribunal claim.
Our team are experienced in valuing what such a claim may be worth and can advise you about the cost of bringing the claim enabling you to decide whether to accept the offer or reject it and proceed to tribunal.
That said, in our experience, the offer is usually sufficiently high that your best interests are served by accepting it and moving on to find a new job.
Contact us now
Our experienced Employment team are happy to discuss more in detail with you about Settlement Agreements, please feel free to contact us by clicking here.
