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Employment and Settlement Agreements – how to ensure a smooth exit

Posted on the 29th June 2022 by Noel McNicholas

It’s inevitable we will leave one job for another at some point during our working lives.

In many cases this will be straightforward - handing in our notice, working a month or three and then starting with our new employer. But in some cases it may be necessary and desirable for an employee and an employer to enter into a Settlement Agreement.

The circumstances in which a Settlement Agreement may be required vary according to the circumstances in each particular case. It may be that the employer and employee are unhappy with the conduct of each other or it may result from a downturn in business or a restructure which has led to a genuine redundancy. Or it may be just a mutual parting of ways.

In many cases a Settlement Agreement is a very helpful device which can be used to deal with a departure in the interests of both parties so that there is an orderly and agreed exit. The Settlement Agreement is entirely voluntary but it has the benefit of being a choice for the employee to accept rather than it being imposed upon them. It also gives both parties finality and confidence that each can walk away knowing the matter is concluded once and for all.

If you are presented with (or are considering entering into) a Settlement Agreement, we can help you to explain its terms and effects before you walk out the door. It is crucial to obtain information from a Settlement Agreement solicitor.

So what is a Settlement Agreement?

A Settlement Agreement is an agreement between employee and employer which will usually - in exchange for a sum of money and/or other benefits - prohibit the employee from making a claim in an employment tribunal or any other court against the employer. Settlement Agreements were formerly known as Compromise Agreements.

There are certain common features of Settlement Agreements:

  • They are legally binding in the sense that once all parties have signed and all its terms are met, the employee will be prohibited from taking practically all claims against the employer. There are a few exceptions to this but essentially the employee will be waiving their right to make any future claim against their ex-employer.
  • The discussions surrounding the terms of the Settlement Agreement are strictly without prejudice and subject to contract. This means that until both parties (plus a legal advisor on behalf of the employee) have signed the Settlement Agreement, it is not binding.
  • Settlement Agreements are voluntary and this gives an employee confidence in making a decision which they are content with.

When might I receive a proposed Settlement Agreement from my employer?

The circumstances are always dictated by the particular position the employee is in. As mentioned, sometimes a downturn in business can lead to redundancy which in turn can lead to a Settlement Agreement. Alternatively there can be a merger or restructure that makes the employee’s role no longer tenable. Sometimes the relationship between an employee and their employer (or the team they work within) deteriorates and both parties agree that it would be better for the employee to depart on agreed terms.

Settlement Agreements are useful in the sense that they can provide a swift resolution to an employment relationship which has run into difficulties or turned sour. Both parties can also avoid significant employment tribunal/court costs as well as saving considerable management time and potentially adverse publicity, particularly for the employer. Finally a Settlement Agreement will allow both parties to move on which in many ways is its own reward.

What does a Settlement Agreement cover?

Most Settlement Agreements follow a set format:

  • Confirmation of a termination date, the last day of employment.
  • Confirmation salary and usual benefits will be received up to the termination date.
  • The employee will either work their contractual notice period or otherwise be paid for their notice period.
  • There is often a compensatory element - either in terms of a redundancy payment which may be enhanced (rather than just statutory) or an ex gratia payment where it is a mutual parting of the ways – that will act as the carrot for the employee.
  • The Settlement Agreement will set out a timeframe for the payment of any redundancy pay or other compensation payment.
  • It will also refer to the property in the employee’s possession which must be returned to the company.
  • There may also be express references to any restrictive covenants which are included in the employee’s contract of employment that will prohibit certain acts, such as working for a competitor for a set period of time.
  • It will be strictly confidential. In other words the terms cannot be shared by the employee or the employer except between close family members (or internally in the case of the employer) and for both parties’ respective legal/tax advisors etc.
  • Fundamentally the Settlement Agreement will prohibit an often very long list of claims including unfair dismissal, constructive dismissal and so on.
  • The Settlement Agreement will often include an agreed reference albeit it is often neutral, stating no more than a start and finish date, what the employee’s role was and little more.

Is any part of the Settlement Agreement tax free?

The Settlement Agreement may permit the employee to take a tax free compensatory element (i.e. for redundancy or an ex gratia payment) up to £30,000. Beyond this the employee’s usual tax bracket will apply. All payment for payment in lieu of notice, holiday pay and other benefits would be taxable in the normal way.

Negotiating a Settlement Agreement

The employee and the employer will normally agree the terms of their departure by negotiating a Settlement Agreement to include all the express terms such as departure date, financial compromise and any other material points such as an agreed reference.

Settlement Agreement Solicitor - what can we do for you?

In order for a Settlement Agreement to be valid, certain conditions must be met including that the employee receives independent legal advice from a relevant advisor. The costs for instructing an independent legal advisor are usually underwritten entirely by the employer. At TFS we can act as the independent legal advisor on your behalf. We act for many employees and employers within Leicestershire and Warwickshire and beyond.

It will be open to the employee to decide whether they wish to accept the terms as set out in the Settlement Agreement. They may decide to negotiate further or could refuse to sign the Settlement Agreement. These options can be addressed with us.

Should you require any further advice or guidance please contact Noel McNicholas on 01926 887700 or at our contact details below.