We offer this article to those of you who would like to know more about what a settlement agreement (or compromise agreement) actually is, and what it usually contains. The article is intended to complement the various others on our website that discuss different aspects of settlement agreements, and in particular our main article on how much you are likely to get in your settlement agreement.
Settlement agreement or compromise agreement: what’s in a name?
First of all a word about the terminology: ‘settlement agreement’ and ‘compromise agreement’. Why are there two terms and which one is correct?
Well, back in 2013 the government of the day decided that compromise agreements would from then on be called settlement agreements. Their thinking was that a settlement placed greater emphasis on the positive aspects of two parties settling, rather than on the more negative ones of them having to reach a compromise. The underlying legal framework remains the same, no matter what terminology you use. We will use the term ‘’settlement agreement’ in the rest of this article, as that’s the official name.
So, what is a settlement agreement?
In essence your settlement agreement is a legally binding document that usually ends an employment relationship. It settles any claims you may have against your employer relating to your employment and the termination of your employment.
Typically, your employer will offer a monetary sum to settle claims and end the employment relationship with you. Following negotiations, this may be more than your employer wanted to pay and less than you asked for, so you settle somewhere in between.
What payments are contained within a settlement agreement?
- Contractual payments up until the termination of employment
- Payment of a termination payment, including an ex gratia payment
- Additional sums as consideration for new clauses of confidentiality and/or post-termination restrictions
What other clauses should you expect to see in your settlement agreement?
The purpose of the agreement is to settle any claims that you might have against your employer, including all statutory/contractual claims that might arise in an employment context. The majority of settlement agreements will list the statutory claims as a schedule attached to the agreement.
Most of these kinds of claims are largely irrelevant. However, it is always worth discussing with your solicitor any matters that could give rise to additional claims, as you may be advised that the sums offered aren’t enough and that there may be scope to negotiate better terms. Or potentially, it might be possible to exclude a claim, for example, an existing personal injury claim, which would allow you to continue to pursue this legally outside the confines of the settlement agreement..
Virtually all agreements will have clauses that require you to maintain confidentiality both about matters relating to the employment relationship and also about the existence and terms of settlement. There is no reason why these should not be reciprocated by the employer and most employers will agree to this.
Additionally, agreements will expect you not to disparage or ‘bad-mouth’ the employer. Again this should cut both ways. This may explicitly mention making comments on social media but usually the clause will be broad.
Click on the link if you would like to have a look at some examples of settlement agreements drawn from ‘real life’.
How will the payments made under the terms of the settlement agreement be taxed?
Up until the termination of employment your usual salary and benefits will be subject to tax and national insurance as usual.
Any contractual payments that you are being paid under the terms of the settlement agreement will be subject to deductions for tax and national insurance contributions in the usual way. Any termination payments being paid as compensation will be tax free to the extent that they are under £30,000. Any sums that are over £30,000 will be subject to income tax as usual, except in redundancy cases . As matters currently stand there is no deduction for national insurance, although recent financial legislation proposes a change in NI contributions for employers from April 2020.
If your employer is asking you to sign up to new terms of confidentiality or restrictive covenants in the settlement agreement then they will usually identify a separate sum of money as consideration for these additional obligations. By a strange quirk of legislation, this is a sum that will be subject to tax and National Insurance.
As a matter of practice, the employer will insist on a tax indemnity clause that will mean that if the Her Majesty’s Revenue and Customs (HMRC) consider that the sums should be treated differently than under the terms of the settlement agreement, then you will be responsible to account to the HMRC for any additional tax paid. This is very standard and it would be unusual for HMRC to consider that any more tax should be paid.
What’s the average amount of a settlement agreement?
This question is often dovetailed with others, for example, Is the amount offered fair? Am I entitled to more compensation in settlement? There is no average sum but experience has taught us the interplay of various factors in the average settlement agreement. Our article on ‘Setttlement agreements: How much?‘ is all about these kinds of questions.
In a redundancy situation, the law sets out a minimum requirement to pay a statutory redundancy payment which is calculated with reference to a fixed tariff of a week’s pay (which changes annually) x years of service x an age factor. The fact that the statutory scheme offers a baseline is seen by some employers to be a green light to offer a statutory redundancy payment or a modest enhancement based on an actual week’s pay. This is most common in large-scale redundancies when a lot of staff are going at once. It tends to follow that an individual leaving employment will be offered more bespoke terms and usually a settlement in the region of 3 months pay in addition to pay in lieu of notice. See our Redundancy article for more on this.
Can a settlement agreement be withdrawn?
The ACAS guidance suggests that an employee should be given 10 days to give consideration to an offer made under a banner of without prejudice or as a protected conversation. This should give you ample time to think about the offer, review your options and hopefully instruct (Monaco) Solicitors.
Under contract law any offer can be withdrawn before it is accepted. So it is possible that an employer can take an offer off the table but in reality the occasions when this will happen will be very specific. In the first instance, an employer will be offering a settlement agreement to terminate an employment relationship, often as a means of resolving a dispute, or as an alternative to following a formal process, for example a performance improvement plan.
Usually there will be a level of pragmatism on the part of the employer to keep an offer open. This is because taking an offer off the table is likely to make a dispute or formal process more likely. This will not only mean that the employer has to allocate time and resources in the workplace but also mean that you, as the employee, might be more likely to commence employment tribunal proceedings and also take a more entrenched view. Having said that, employers can use this as a bit of a strong arm tactic, particularly if there has been protracted negotiations or if tribunal proceedings have already been commenced.
Do I need a solicitor?
The requirements of the law on settlement agreements means that you must receive advice from a solicitor, barrister, law centre worker or certain Trade Union Officials before signing a settlement agreement. The purpose is to ensure that an appropriately qualified independent adviser has explained the effect of the settlement agreement on your rights to pursue a claim to the employment tribunal or other courts.
The employer will usually cover the cost of the employee having the settlement agreement reviewed and explained in this way. There is good reason to instruct a solicitor to advise you as they will be best placed to advise on the offer, the terms themselves, and potentially to renegotiate the terms so that they are more favourable to you. (See also our article on Concluding a settlement agreement.)