Settlement agreements (formerly known as compromise agreements) provide that in return for a payment you give up your right to bring claims against your employer at the employment tribunal or in the courts.
Settlement agreements are individual contracts between you and your employer. As such, the content of a settlement agreement is not set in stone and there is absolutely no standard way to do them. There are certain minimum contents set out by statute, such as it must be in writing and signed by an independent advisor, but the money element is often open to negotiation.
Solicitors to sign your settlement agreement
A settlement agreement will be legally binding if it is signed by you, your employer and you also receive independent legal advice from a solicitor or barrister as to its terms and effect. You usually pay nothing for advice from a lawyer on the agreement, because it is usual for employers to pay for that. We see hundreds of settlement agreements and can tell you whether your one is a common way of doing things, or if there are any specific issues lurking in the small print.
Clearly it is not in your employer’s best interests to pay for a solicitor to represent you in ‘without prejudice’ negotiations or in an employment tribunal with the aim of winning you more money. It is best for them to just pay for a settlement agreement to be signed off as quickly as possible. So if you wanted to instruct us to negotiate a better deal for you, there would be a separate fee for this.
TOP 3 TIPS
- If you sign a settlement agreement you will give up all rights to sue your employer – even for existing contractual rights
- Ensure you remain entitled to all payments you are contractually due
- Ensure you understand the tax treatment – you will ultimately be liable
Settlement Agreement Payment: checklist
The agreement should clearly state how and when the payment(s) will be made and when your employment will end.
Check the agreement for all of the following:
- All outstanding salary
- Any expenses owed
- Your contractual notice, or statutory notice if that is greater
- Holiday pay
- Car allowance
- Bonus payments
- Pension payments (see our separate section on pension payments)
Consider non cash benefits:
- Company car
- Health insurance and life insurance, is there the option for these to continue?
What deductions, if any, will be made:
- Some employers ask for contractual maternity pay to be repaid if you leave before a specified amount of time has passed after your return to work (normally around six months).
- do you have a season ticket loan or any other loans with your employer?
- Have you taken more holidays than that you will have accrued at the end of your employment?
Payment dates are normally around 14 to 28 days after signing the settlement agreement or after your last day of employment, whichever is the latest.
Settlement Agreements Tax: a Summary
What can usually be paid free of tax (“gross”):
- If there is no pay in lieu of notice clause (“PILON”) clause in your contract of employment and your employer asks you to leave immediately without working your notice then no tax is due on the monies you are paid in compensation (or damages) for loss of your notice.
- Compensation for loss of employment up to £30, 000.
- Payment of legal costs
- A payment for injury to feelings caused by discrimination or personal injury during your employment.
- It can be tax effective to have a payment made into a pension
What payments in a settlement agreement are taxable?
- Holiday pay
- Compensation for loss of employment over £30, 000.00
- A payment in lieu of notice where your contract contains a PILON clause. Some contracts of employment have PILON clauses, but by no means all.
- A payment for a restrictive covenant. If your employer wants you to enter into new covenants it is important you get specialist advice on the level of compensation offered; there may be tax implications if HMRC later consider the amount paid too low.
What is a tax indemnity?
Employers usually ask for one of these and they are a standard clause in most settlement agreements. If, after the agreement is signed, HMRC deem that tax is due on a payment made to you they will look to your employer to pay this tax. The indemnity means that you have promised to pay this money back to your employer and if you don’t pay your employer can sue you for this money.
Whatever your age it is very important to consider your pension, but particular care should be made if you are nearing retirement. The following should be considered:
- Will pensions payments continue after your employment has ended?
- Will a lump sum be paid into your pension?
- Do you have all the information, documents and contact details (of your pension provider) from your employer about your existing pension?
- Does the payment in the settlement agreement adequately account for any loss of employer pension contributions and pension rights?
- If you hold shares you should check your shareholders’ agreement. You may be required to sell back shares on your employment ending.
- Check the share option scheme and what it states about leavers, it may be important that you do not leave as a “bad leaver” or as someone who has left with “cause” and if the share options are valuable to you it should be stated within the settlement agreement that you leave as a “good leaver”. Ask the employer to confirm and in any event ensure you know what will happen to your share options.
Employers often ask the employee to agree not to “bad mouth” the employer. There should be a reciprocal clause in which they agree or use their best endeavours to ensure that they and their staff do not “bad mouth” you.
Employers often want the terms and existence of the agreement kept confidential. Ensure you don’t promise retrospectively if you have discussed your problems at work. Where possible try to be discreet regarding who knows that you are in negotiations with your employer, in that way if you are asked to warrant that you haven’t discussed the issues you will not be in difficulty. Employers usually agree that confidentiality can exclude your immediate family, professional advisers and prospective employers.
Personal injury & pension rights
While the settlement agreement is likely to state that you give up all your claims, there are some exceptions which should never be given up. These are:
- a claim for a hidden personal injury claim where you are unaware of it or of facts that might give rise to a claim. e.g. if you were in contact with a substance at work that was believed to be harmless but many years later caused severe disease, you would still be able to bring a personal injury claim.
- claims for accrued pension rights – your pension is always protected and can’t be settled.
Some employers offer outplacement services as part of the settlement agreement and in addition to the payment. It consists of specialist support looking for work that can include career counselling, CV writing and interview preparation. It can be excellent and it is worth asking your employer to include this particularly if you are being made redundant by an organisation that has employed you for a long time.
References in settlement agreements
A reference often forms part of the settlement agreement, and it is certainly worth including. Some employers will only confirm dates of employment and duties whereas others are willing to comment favourably on an employee. What is agreed will depend on the employer’s usual practice and the circumstances surrounding your departure. There is no obligation on any employer to provide a reference and it is one of the advantages of settling a case that a reference can be agreed as part of the settlement agreement.
After your employment has terminated you may be able to claim Job-Seekers Allowance (JSA). If you want to claim JSA the reason for leaving should be carefully considered and where appropriate be labelled as “redundancy” as there is a risk if the agreement says you resigned the Department for Work and Pensions (DWP) will not pay you. It is worth making a claim if you meet the eligibility criteria as for the first six months JSA is not means tested. Check with the DWP for more information and any recent changes in their criteria.
Depending on your situation you may be entitled to other benefits and you should check with the DWP to see if you are entitled to other benefits e.g. housing benefit, council tax benefit, tax credits
If you are long term sick or disabled you may be entitled to claim incapacity benefit and/or disability living allowance or its equivalent. Again, do gain check with the DWP.
Mortgage/income protection insurance policies
If you have an insurance policy that will pay your mortgage or replace some or all of your income upon redundancy/dismissal it is essential that you check out the terms of your insurance policy before you sign any settlement agreement. Some policies will only pay out if you have been dismissed or been made redundant. This means that if appropriate the agreement should make clear that the termination was dismissal and/or redundancy.
If your employer wants you to leave in theory they can discuss a settlement agreement with you, sure in the knowledge that even where there is no existing dispute you cannot rely on the discussion in later litigation and/or as a breach of contract.
However, these protected conversations only apply to unfair dismissal cases, so if your case involves something else such as discrimination or breach of contract the conversation will not be protected. You may then be able to rely on it in litigation.
If you have been invited to a settlement agreement discussion, take careful notes, ask for any offer to be put in writing and get canny and early advice on that offer.