Employee Guide to Settlement Agreements
23 January 2018
What is a Settlement Agreement?
A Settlement Agreement (formerly called a Compromise Agreement) is a legal contract between an employee and their employer, in which the employer offers the employee a payment in exchange for the employee not bringing an Employment Tribunal claim (or multiple claims) against the employer.
This will usually be because the employment rights of the employee have been breached in some way, or it will act as a severance payment if the employer wishes to terminate the employment in a way that breaches their employment contract.
A common misconception is that a Settlement Agreement will always result in the employment being terminated. This is not necessarily the case and some employees may settle a dispute with their employer in this way and then remain in their employment. This can be the case if the dispute concerns pay, workplace harassment or holiday, for example.
What to Do if You Receive a Settlement Agreement
If you have been offered a Settlement Agreement by your employer, then it’s important to know that you have the right to negotiate the terms of that agreement. You are in no way obliged to accept the offer or the terms.
The amount that has been offered should be a fair reflection of the seriousness of the dispute or breach of contract. It should also reflect the amount that you might expect to be awarded if you were to raise a claim in the Employment Tribunal.
It’s always advisable to obtain legal advice from an Employment Solicitor, who can discuss your circumstances and talk through the terms of the settlement offer and the terms of the proposed Settlement Agreement with you. The Employment Solicitor could then negotiate with your employer on your behalf to ensure that you receive a fair Settlement Agreement.
Your employer will usually pay for you to get legal advice regarding your Settlement Agreement and for an Employment Solicitor to review the draft agreement once drawn up. This would not include negotiations being carried out on your behalf – you would usually be liable to pay for any negotiations yourself.
Negotiating a Fair Settlement Agreement
You can negotiate the terms of your Settlement Agreement with your employer directly, should you choose to do so. It’s a good idea to have decided how much compensation you are looking to get before you start negotiations. It’s also important to know your employment rights so that you are fully aware of any breaches that have been made by your employer, the implications of these breaches, the potential claims you could bring and the compensation that you may be entitled to as a result.
You can choose to negotiate with your employer face-to-face, though some people might not feel confident in doing this. You can carry out the negotiations in writing if you prefer, either by email or post.
All Settlement Agreement negotiations that take place between you and your employer are confidential. As a general rule, it is not possible for either side to use this correspondence in an Employment Tribunal. However, to be on the safe side, it’s a good idea when negotiating in writing to state that you are discussing the matter “without prejudice”. The inclusion of this legal term means that the discussion is taking place off the record, and as such it cannot be used as evidence in an Employment Tribunal.
Will the Compensation Payment be Taxed?
Most Settlement Agreement compensation payments made in England and Wales can be tax free up to the first £30,000, if the payment relates to the termination of employment and depending on how the agreement is worded. The amount of any payment over £30,000 may be liable to tax.
Payments made to an employee in lieu of salary or in lieu of holiday will be recognised as taxable earnings, so income tax and National Insurance will be payable on these. In certain situations payment in lieu of notice may also be liable to tax and National Insurance. It’s a good idea to obtain advice from an Employment Solicitor to manage the tax implications of your Settlement Agreement compensation payment.
Making a Settlement Agreement Legally Binding
Once an agreement has been reached, in order for the Settlement Agreement to be legally binding, it must comply with the following requirements:
- Fully explain each complaint or claim that it covers (to protect your employer from repeat claims being made)
- The terms of the Settlement Agreement must be in writing
- The employee must have received independent legal advice covering the terms and effect of the Agreement (this advisor must be a qualified professional and have Professional Indemnity Insurance)
- The independent advisor will need to be named in the Settlement Agreement.
Once the Settlement Agreement is in place and is legally binding, you will have relinquished any right that you would have had to raise a claim against your employer in an Employment Tribunal.
See some examples of successful Settlement Agreement cases.