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Everything you need to know about Settlement Agreements

Settlement Agreements can often be a useful tool in resolving workplace disputes and for bringing employment relationships to an end in a mutually agreed way.

However, the process of approaching and negotiating a Settlement Agreement can be tricky to navigate, so here is our guide on everything you need to know about Settlement Agreements in the workplace.

What is a Settlement Agreement?

A Settlement Agreement (formerly known as a Compromise Agreement) is a legally binding agreement between employer and employee. The employee's employment will terminate on an agreed date and the employer will pay a severance payment in return for the employee's agreement not to pursue any claims in a Tribunal or a Court. The employee must take independent legal advice on the terms of the Settlement Agreement.

There are a number of specific legal requirements that must be met in order for a Settlement Agreement to be valid. It must be in writing; relate to a particular complaint; identify the independent legal adviser; state that the independent adviser has given the employee advice and is covered by a contract of insurance; and state that the statutory provisions governing Settlement Agreements have been met.

Will a conversation about a Settlement Agreement be used against us?

When negotiating a Settlement Agreement all correspondence and discussion with the individual about it should be stated to be "without prejudice". This is important as it will usually protect the discussions from being referred to in a Court or Tribunal, should negotiations break down.

However, simply marking something "without prejudice" will not be enough to ensure the rule applies. The correspondence or discussion must be a genuine attempt to settle an existing dispute, in order to qualify for "without prejudice" protection, so it will not apply if there is no obvious dispute between the parties, for example, if the settlement negotiations have arisen because of poor performance by the employee.

Since July 2013, employers have been able to have off the record conversations with their employees regarding the termination of employment in the knowledge that such conversations will be "protected" under Section 111A of the Employment Rights Act 1996. Employers should therefore ensure they also refer to s.111A in any settlement correspondence.

What about victimisation and discrimination cases?

Employers should think carefully before initiating a "protected conversation" and offering a Settlement Agreement to an employee in circumstances which could foreseeably result in a discrimination or victimisation claim, because these negotiations will not be protected by the rule in s.111A. The individual concerned would therefore be able to refer to the Settlement Agreement negotiations in a Court or Tribunal to try and evidence detrimental treatment.

Similarly, the "without prejudice" rule may not apply to discrimination and victimisation claims, so in these circumstances it will be even more important that the negotiations are conducted in the right way, and that the financial offer is attractive to the individual concerned.

How to reach a deal with an employee

The crux of a Settlement Agreement is that, by signing up to it, the employee is agreeing to relinquish their rights to pursue any future claims against their employer relating to their employment or its termination. The deal on the table should offer the employee reasonable compensation for giving up the right to claim.

What a reasonable sum is will vary considerably depending on the type of claim, the strength of the case and the employee's position in the business. It may be that the employee is entitled to a redundancy payment, or if it is a discrimination claim then the employee may be entitled to an award for injury to feelings. Employers should also take into consideration any sums the employee might be contractually entitled to anyway (such as pay in lieu of holiday or notice).

As the employee must receive independent legal advice on the Agreement, if they aren't being compensated reasonably then it is likely that they will be advised not to sign it.   

Money isn't always everything

It can be helpful to think outside the box when negotiating with an employee. For example, providing a positive reference, or agreeing the wording of an internal or external announcement regarding their departure, might help to seal the deal. Alternatively, agreeing to transfer a phone or a company car, or to contribute to the costs of some outplacement counselling or career coaching, might get the deal over the line.

What are the tax implications?

Any payments due to an employee under their contract of employment will be subject to the usual tax and national insurance deductions. However up to £30,000 can be paid tax free for compensation for loss of employment. This would include any redundancy or ex-gratia payment.

Our award-winning Employment Team regularly gives advice to employers on how to initiate settlement discussions, as well as drafting the "protected conversation" letters and Settlement Agreements to go to employees, and negotiating settlement terms on the employer's behalf. We are also experienced in giving advice to employees on the terms and effect of Settlement Agreements they have been offered by their employers.

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