Larken & Co. legal expert explains ending an employment relationship by settlement
Employment relationships don’t always work out and can end for many different reasons, including redundancy, dismissal for conduct, performance, or capacity, workplace disputes, and mutual termination, writes Lesley Purveur, of Larken & Co.
Businesses are therefore increasingly turning to settlement agreements to resolve disputes and employment relationships in a structured way. They have been around for some time now, and have proven to be a good alternative to having to go through a long drawn-out disciplinary, or redundancy process, followed by ACAS early conciliation programme and uncertainty of tribunal proceedings.
What exactly is a settlement agreement? In simple terms, it is a legally binding agreement between an employer and employee to end employment on specific terms agreed between the parties, which typically include a promise by the employee not to pursue employment tribunal claims in return for a settlement amount.
Requirements of a settlement agreement:
To be valid, it must meet several criteria, including that it must be in writing, relate to a particular complaint, be sign-ed by the parties, and record that the regulating requirements have been satisfied.
The employee must also receive independent legal ad-vice on the terms of the agreement, and the effect on their ability to pursue any rights in an employment tribunal. This is crucial to protect employee interests and to ensure that the waiver of rights is both informed and voluntary.
What should a settlement agreement include?
Not all agreements are identical as circumstances of each case will vary. Broadly speaking, there are elements common to most, such as:
Amount of compensation to be paid — this may include payments for redundancy, unpaid wages, bonuses, pay in lieu of notice, and any holiday pay entitlement.
Any restrictions on the employee’s future employment.
Confidential matters — such as restrictions from employees telling anyone they have entered into a settlement agreement, and returning company property
Mutual agreement that the parties will not make derogatory comments or disparaging remarks about one other.
Inclusion of an agreed reference and form of wording for announcement to colleagues and clients.
When is the compensation paid and are there any tax implications?
Usually sums that are agreed to be paid under a settlement agreement are paid within 28 days of the date of termination which is specified in the agreement. Under current tax legislation, up to £30,000 of genuine compensation can be paid on a tax-free basis in certain circumstances. This will depend on the specific circumstances and payments that are being offered to you.
An employer will deduct from the payments under the agreement any income tax and employee national insurance contributions that are required to be deducted by law.
Is there a charge for the independent legal advice?
The settlement agreement is likely to include a legal fee contribution towards the cost of an employee’s legal fees in obtaining advice.
Any discussions or negotiations between employee and employer in connection with the settlement agreement should be conducted on a without prejudice basis or as part of a protected conversation. This means that if an agreement cannot be reached, those discussions cannot be used as evidence in any employment tribunal or other court proceedings.
Settlement agreements are a valuable tool to end an employment relationship quickly and quietly. They protect the employer be-cause the employee signs away almost all legal rights that they may have and, in return, the employer usually offers the employee more money than they would ordinarily be entitled to.
As they offer a clean-break and avoid time, costs and stress associated with protracted formal complaints or tribunal claims they are regarded as an attractive and sensible commercial option. In addition, terms negotiated through settlement agreements can often represent a better financial outcome.
On the downside, for an employer there are costs associated with the drawing up of the legal agreement, and the legal fees for the independent advice. This could of course be a small price to pay in the long term.
However, where a settlement is not agreed, any ongoing employment relationship can be jeopardised and may have an adverse effect on employment relations in the wider workforce.
When faced with a settlement agreement, it is important for employees to get swift advice. This can be an anxious time, and you will need to consider if any issues of unfair treatment or discrimination arise before you sign, so that an informed view can be made as to whether you are being offered a fair package.
