Knight-Webb Solicitors are employment law specialists and have successfully advised on a large number of Settlement Agreements for both employers and employees. We are based in Dulwich in South East London but are able to provide appointments in central London at the convenience of clients.
Principal solicitor, Sunita Knight-Webb, previously worked in a City law firm and has over 15 years of experience in advising on employment law matters. She has a degree in law from Cambridge University and is a member of the Employment Lawyers’ Association.
A Settlement Agreement (formerly Compromise Agreement) is a legally binding contract in which an employee agrees to waive his or her legal claims against the employer on agreed financial and other terms. It is usually entered into in connection with the termination of employment and sets out the terms of settlement between the employer and employee.
Settlement Agreements offer the benefit of certainty and a clean break in the employment relationship. An employee will have the security of an agreement setting out what financial settlement he or she is receiving together with other important matters such as a reference. The employer on the other hand has the confort of knowing that it will not have to face a claim in the employment tribunal including for unfair dismissal or otherwise as a consequence of the dismissal. For these reasons, many employers will offer employees a settlement agreement on termination, even where they have followed a fair process or the employment has ended amicably.
What does “without prejudice & subject to contract” mean?
You will more likely than not see this heading on a settlement agreement that you have been given, or in a covering letter/email. The phrase “without prejudice” means that communications regarding the settlement agreement cannot be admitted in subsequent tribunal or court proceedings as evidence, unless there has been improper behaviour. This includes any conversations that are preceded with “without prejudice”, which is more likely to happen where you are facing performance allegations. The reason for labelling the communications “without prejudice” is to enable parties to discuss termination arrangements freely without fear of such evidence finding its way to a tribunal if the settlement negotiations breaks down.
“Subject to contract” means that the settlement agreement will not be binding unless and until there is an agreed signed contract on the final wording. This stops either party saying that there has been a prior binding agreement.
ACAS Code of Practice on Settlement Agreements
More information on settlement agreement can be found in the ACAS Code of Practice on Settlement Agreements, which sets out how settlement agreements should operate and also provides best practice of how pre-termination negotiations should be undertaken.
The ACAS Code recommends that employees are given a period of 10 calendar days to consider an offer made by an employer.
The Code also gives examples of “improper behaviour” associated with reaching a settlement including putting undue pressure on you to agree an offer. This includes, for example, an employer saying before any disciplinary proceedings have begun that you will be dismissed if you don’t accept the offer, and also all forms of bullying and harassment and intimidation.
You may be presented with a settlement agreement by your employer completely out of the blue. A common scenario in which this happens is where your employer has concerns about your performance and wants to give you the option to leave under agreed settlement terms rather than go through a performance process. In this situation, you do not have to accept the offer. You can reject it, or request a proper performance process is followed although this could affect your reference if you are later dismissed.
Unless you consider the offer is too good to turn down, you should preferably just listen to what your employer has to say at the first meeting- without committing yourself either way, and then take legal advice.
Usual terms in a settlement agreement
The terms typically found in settlement agreements include the following:
Termination Date: This will set out when your employment has ended, or will end. This may be several months away, or very frequently, the proposed date is close to the date when you have been presented with the agreement. Your termination date will also be dependent on what notice period you are contractually entitled to and the temrs in your employment contract concerning notice.
Compensation: For employees, this is likely to be the most important aspect of the Agreement. The first £30,000 of compensation for loss of employment under the agreement (other than post-employment notice pay) can usually be paid free of deductions for tax and national insurance contributions. It is also important that there is a timeline for payment of this sum (for example, in the next payroll, or 21 days after the signing of the agreement). Depending on the circumstances surrounding the proposed termination of employment, it is often possible to negotiate the compensation figure upwards, and this is something we will be able to discuss with you.
Tax indemnity: In light of the fact that some elements of the compensation can be paid tax free, a tax indemnity is almost always given by the employee. This makes you ultimately responsible for the payment of any tax and national insurance should HMRC determine that additional tax should be paid.
Notice: The settlement agreement will set out what notice you are entitled to, including whether you have to work that notice or not. Often, you will be paid in lieu of notice (otherwise known as “PILON‘). Typically, a PILON payment will reflect your full notice in one lump sum (or the balance of any notice due), and also means that your termination date will be much sooner that it would have been had you worked your full notice. PILON payments will always be subject to tax and NIC.
Payments up to the Termination Date: The Agreement needs to provide that you will be paid your salary, accrued holiday, benefits, bonus and outstanding expenses up to the termination date. Please note that most benefits stop at the termination date (including life cover and health insurance), unless otherwise agreed.
Bonus or commission, deferred stock options and share awards: If you are entitled to a bonus, commission or deferred stock option or share awards, the agreement should set out how these will be treated. with unvested stock awards, the treatment will often depend if you are treated as a good leaver or bad leaver.
Pension: Where applicable, payments into your pension fund should continue up to the termination date and, where a payment in lieu of notice is being made, your employer may be obliged to continue to make contributions for an equivalent period depending on the terms of your contract. Where you elect to pay part of the settlement sum into your pension, this needs to be provided for in the settlement agreement otherwise you may not be able to take advantage of the tax free nature of the payment into your pension.
Return of employer’s property: You will usually be required to return company property within a certain timeframe, usually on or before the termination date. If you have been allowed to retain some property such as a laptop and phone, this needs to be set out in the Agreement.
Waiver of claims: Your employer will want to ensure that the Agreement prevents you from bringing future claims against your employer. The Agreement usually specifies which claims are being waived (i.e. unfair dismissal and/or breach of contract). There will often be a long list of claims that you are agreeing to waive any right to claim under. This is entirely usual. Your employer cannot, however, compel you to waive your right to claim for any personal injury which you were not aware of at the date of signing of the agreement. Your accrued pension rights should also be preserved.
Warranties: You usually have to warrant that you are not aware of any circumstances which would have entitled your employer to dismiss you without notice (summary dismissal) prior to the signing of the Agreement. This covers the situation, for example, where you have committed some act of gross misconduct, but have been covering this up.
New job offers: Ordinarily, you are not under an obligation to disclose future job offers (and would not be advised to do so). However, in some cases, the Agreement will require you to warrant that you have not had a job offer from a new employer. The reason for this is that is that in assessing the value of a potential claim in the employment tribunal (and therefore the settlement offer), a key consideration is your loss of earnings. If you have a job offer, this could impact on your employers decision to pay you a certain level of compensation if they knew you were simply going to walk into another job.
Reference: An employer is under no legal obligation to provide you with a job reference, so it is always advisable to make sure that one is attached to the Agreement which becomes binding on your employer. Many employers will only provide a factual reference which sets out dates of employment and the employee’s job title, particularly where the employee is leaving due to performance concerns. It may be possible, however, to negotiate a more personal reference which again, should be attached to the Agreement.
Confidentiality: This clause prevents you from discussing the terms of the settlement agreement and, in some cases, the circumstances surrounding it. You should ensure that you are able to discuss the Agreement with your immediate family, however, and you need to be able to inform prospective employers of the reason why you left, even if this is simply in general terms.
Non-derogatory clauses: There will usually be a clause which prevents you from making derogatory remarks/statements about your employer to a third party. It is important to try to ensure that there is some level of mutuality so that your employer (or named individuals) cannot make disparaging comments about you either or at least to potential employers.
Restrictive covenants: Where you have restrictive covenants in your contract of employment, these are likely to be re-affirmed in the settlement agreement. It may also be possible to negotiate a reduction or, in some cases, a complete removal of some or all of the restrictions. Where the restrictive covenants are new, these also need to be checked to see if they are too onerous and whether, in fact, you should be agreeing to them at all.
Legal fees: Most employers will agree to pay a contribution for you to receive legal advice in relation to a review of the Settlement Agreement. This will vary from employer to employer.
If you have a query regarding Settlement Agreements, please contact Knight-Webb Solicitors in London.
If you have been offered a Settlement Agreement by your employers and asked to take legal advice, we are able to assist. In order for you validly to waive your employment tribunal claims under a Settlement Agreement, you need to have taken legal advice from a ‘relevant independent adviser’, which is why employers will often offer to contribute a sum towards the employee’s legal expenses. In most cases, we are able to work within the employer’s contribution and the employee need not make any additional legal fees contribution. We are thorough in our advice and will negotiate hard on the terms of settlement if this is what you require.
Our clients have ranged from directors of FTSE 100 companies and senior executives to employees on the national minimum wage.
Whether you are a large or small business, if you would like advice regarding an issue with your employees, we can help you. We have many clients who are employers and have years of experience in advising on employment disputes. We can assist in all stages of negotiations including opening a ‘protected conversation’ with the employee and preparing settlement agreements. Please contact us today.