Spotlight on Settlement Agreements – Advice for Employers

Key facts and information

You may have good reasons for wanting to dismiss an employee; they are not performing, there is a misconduct issue, a potentially disruptive redundancy situation, or the working relationship has simply broken down.

Even a fair and carefully arranged termination process can take many different paths and many weeks to complete. Settlement agreements provide an alternative way to resolve disputes saving time, costs and offer peace of mind.

• What is a settlement agreement?
  A settlement agreement is a legally binding, enforceable contract between an employer and employee with the purpose of settling any employment claims the employee may be able to bring against the employer (with some limited exceptions). In exchange for waiving all rights to pursue claims, the agreement will set out a discretionary payment that will be paid to the employee along with some other key terms that are to be agreed.
• How to approach a Settlement Agreement
  Either party can ask the other to have what is referred to as a ‘protected conversation’ to explore the option of the employment relationship coming to an end. This can be done under the ACAS Code for pre-termination negotiations or on a ‘without prejudice’ basis. It is important to seek advice on how to approach the conversation with employees. Often HR or a manager will ask an employee if they are open to such a discussion as an alternative to following and completing an internal process such as disciplinary, grievance or redundancy. It is important that the employee understands it is a choice and not mandatory and to give them time to seek some independent legal advice. If the employee agrees, terms can be proposed, and an agreement drafted for consideration.
• Independent legal advice?
  An employee is legally required to seek independent advice on any settlement agreement they are offered. This is so the terms, and in particular the effect those terms have on the employee’s ability to pursue claims, are fully understood and to ensure the agreement is legally binding. As an employer, it is usual to contribute towards the employee’s legal fees of around £300-£500 plus VAT.
• The importance of confidentiality
  As an employer you will want to ensure that there is a clause in the settlement agreement confirming that the employee is obliged to keep the terms of the agreement and possibly its existence, as well as the circumstances surrounding the termination of their employment, confidential. There will be certain exceptions to this such as being able to discuss the matter with a legal adviser, immediate family, doctor, and counsellor or as required by law.
• Non derogatory statements (‘bad mouthing’)
  Another important term is a clause whereby employees agree to not make any derogatory statements about the company and will not do anything to bring your reputation into disrepute. This is crucial where the relationship has broken down or where there may be conflict, as it protects the reputation of the company, your staff, Shareholders and Directors.
• Post termination restrictions
  It is advisable to include a clause in the agreement which confirms that any clauses in the employee’s contract of employment regarding confidentiality and post termination restrictions (restrictive covenants) are reinforced and must be abided by. Failure to do this, may result in the covenants falling away when the employment contract ends by reason of the settlement agreement.
• What is a tax indemnity?
  With some exceptions, generally the first £30,000 of termination payments (often referred to as ex-gratia payments) are paid free of tax and National Insurance contributions. Any payments made in relation to wages, holiday and notice pay are taxable in the usual way. The agreement will include a tax indemnity clause stating that if any tax liability arises, it will be the responsibility of the employee and not the employer. This means that if the Inland Revenue makes a demand against you for tax, then you can recover that sum from the employee, together with any interest, penalties, or associated costs.

Protecting your business

Our employment law specialists can help you negotiate this particularly tricky area and protect your business by drafting a watertight agreement to give a clean break on the best terms possible for your business - even if there doesn’t appear to be grounds to fairly dismiss the employee.

Protecting your business can be challenging. We recognise there is often a need to act quickly and commercially. There may be a risk that your employee contacts your clients or leaks confidential information. We can draft agreements and all correspondence at very short notice.

There are a number of cost options available including traditional hourly rates, a guaranteed fixed fee or they can be incorporated into our outsourced HR retainer package. To discuss your options including a fixed fee and retainer service, call today on 08000930094 or fill out our online enquiry form.

Advising your employees

If you are not a client of Spencers Solicitors, we do offer a service to your employees, advising them on the terms of their settlement agreements, which in turn benefits you. Meetings can take place at your workplace to advise and complete the agreements in a timely fashion, convenient to your business.

Dependent on the number of settlement agreements you are offering your employees, we may be able to substantially reduce your legal costs.

Enquire Online or call us on 08000930094 for further advice. We are happy to answer any questions you may have.