FAQs: Settlement Agreements for Employees

1. What does “without prejudice” mean?
2. What is a protected conversation?
3. How long do you have to decide whether you want to accept the Settlement Agreement?
4. Do you need a solicitor for a Settlement Agreement?
5. What should you expect from your solicitor?
6. How is a settlement amount calculated?
7. What is the average settlement agreement amount?
8. What is a fair settlement offer?
9. Do you pay tax on settlement agreements?
10. How much will it cost you to seek legal advice?
11. Why are you being asked to sign a Settlement Agreement?
12. Can you tell anyone about the Settlement Agreement?
13. Can you pick your reason for leaving?
14. Can your notice be paid tax-free?
15. What claims cannot be settled by a Settlement Agreement?
16. Can your employer impose new post-termination obligations?
17. What are the penalties for breaking a Settlement Agreement?
18. What happens if your employer breaches the Settlement Agreement?
19. What can I do if the Settlement Agreement is not paid on time?
20. What can you expect from your solicitor?
21. How long does it take to negotiate a Settlement Agreement?
22. Should I accept a Settlement Agreement?
23. What happens if I refuse to sign a Settlement Agreement?
24. What happens if you breach a settlement agreement?
25. What happens after you agree a Settlement Agreement?
26. How does a Settlement Agreement affect me getting another job?

What does “without prejudice” mean?

The “without prejudice” rule allows you and your employer to speak and write openly about settlement terms without compromising your case or their defence. This also means that these negotiations are confidential unless you and your employer agree that they are not.

What is a protected conversation?

A “protected conversation” allows you and your employer to have confidential pre-termination settlement discussions without either of you being able to use the discussions against the other in any subsequent unfair dismissal proceedings.

This protection only applies to ordinary unfair dismissal claims and not other claims such as discrimination. Your employer will lose this protection if they behave improperly in the conversation, for instance, by putting undue pressure on you to sign.

How long do you have to decide whether you want to accept the Settlement Agreement?

According to Acas guidance, employers should give employees a minimum of 10 calendar days to decide whether they want to accept a Settlement Agreement. Your employer should not demand that the Agreement be signed straight away. This may be seen to be undue pressure and could be used to show that your employer has acted improperly.

Do you need a solicitor for a Settlement Agreement?

The law says you can’t sign a Settlement Agreement without having taken the advice of a qualified lawyer, certified trade union official or advice centre worker. All of these advisers must be covered by indemnity insurance and should be specialists in Settlement Agreements.

What should you expect from your solicitor?

Your Settlement Agreement solicitor will explore with you the background to you being offered this Settlement Agreement. We will advise you whether you are being offered a suitable amount of compensation.

Your solicitor should refer to your contract of employment to calculate the correct notice and see if the compensatory sum covers an appropriate amount. If any bonuses are due, your solicitor should look at this and also work out any appropriate redundancy payments.

Much of the Settlement Agreement is written in legalistic language and refers to various issues that can look confusing to those without legal training. It is important that your solicitor explains the legal ramifications of signing a Settlement Agreement including the legal warranties you are entering into, such as a confidentiality clause, and the penalties for breaking any of these warranties.

How is a settlement amount calculated?

The amount offered in a Settlement Agreement will vary depending on the precise nature of the situation. The most significant part of the payment is the termination payment – compensation for the employee’s loss of employment.

When signing a Settlement Agreement, employees will forgo the right to bring a claim against their employer (in most situations), so this sum will depend on the nature of the situation and the level of incentive that the employer is prepared to offer as an incentive for their employee to sign the Settlement Agreement.

In a situation where an employee could potentially bring their claim to an Employment Tribunal, the Settlement amount may reflect what they could potentially get if they were to take this action. An Employment Law solicitor should be able to look at the situation and advise on whether the Settlement amount offered is fair.

What is the average settlement agreement amount?

Settlement Agreement amounts depend from case to case. There is no legal minimum for Settlement Agreement payments, but in the event of compensation for termination of employment, between two and three months’ gross salary is about average. Settlement Agreement amounts in cases of whistleblowing or discrimination are often much higher.

What is a fair settlement offer?

This will depend on the circumstances surrounding the offer of the Settlement Agreement. We would go through the background with you to find out what potential claims you may have against your employer, how strong they appear to be, and how much they may be worth.

This is in order to establish whether the sum offered compensates you sufficiently for the legal rights that you are giving up. Another consideration in deciding whether to accept an offer is how quickly you think you will find another job. This is because any compensation that you might receive in an Employment Tribunal would be based on your actual loss of earnings.

Do you pay tax on settlement agreements?

Generally, the first £30,000 of compensatory (non-contractual) and ex-gratia payments are exempt from tax. However, all salary and benefits made until the contract of employment ends are subject to tax and National Insurance, as are payments in lieu of holiday, payments in lieu of notice.

How much will it cost you to seek legal advice?

The Settlement Agreement should normally cover the amount that it would cost for a solicitor to sign it off – usually £300.00 to £500.00 + VAT. This is normally sufficient for a simple sign off but not for detailed advice or negotiations.

If there are issues still to be determined and the amount offered is inadequate then your solicitor should try not only to increase the compensation but also your employer’s contribution for the additional legal advice. Obviously, if your solicitor is negotiating a higher settlement, then this is usually something that your employer expects you to pay for yourself.

Why are you being asked to sign a Settlement Agreement?

When you sign a Settlement Agreement and accept its terms, you lose your right to make a claim against your employer in a Court or an Employment Tribunal. This means you should resolve all issues within the Settlement Agreement, including any bonuses due and accrued but untaken holiday.

The only exception to this is where your employer offers a Settlement Agreement but has misrepresented the facts to you and the circumstances as to why they want you to sign it. For example, they have told you that your job is redundant when it is not and you have evidence that you have been replaced. This is called “fraudulent misrepresentation”.

Can you tell anyone about the Settlement Agreement?

There will be a confidentiality clause in most Settlement Agreements. Sometimes this only covers the terms of the amount offered in the Agreement. However, in some cases, it covers the existence of a Settlement Agreement which means you must not tell anyone that this is the way in which you have agreed to terminate your contract.

Usually, you can agree on exceptions to this rule so it does not apply to immediate family, spouse and professional advisers. When people are aware that you have a dispute or claim against your employer, it is important to look at what sort of confidentiality agreement has been offered to see if this is appropriate.

Can you pick your reason for leaving?

The Settlement Agreement is confidential and you will not be able to disclose its terms to any third parties except for the normal exceptions which include your immediate family, professional advisers, insurers and HMRC.

If there is a genuine redundancy situation, or there is a possibility of a redundancy situation, you may be able to ask your employer to specify the reason for leaving as redundancy.

This may then be disclosed to your mortgage company for the purpose of being able to make a claim on your mortgage protection insurance policy.

Can your notice pay be paid tax-free?

No.

What claims cannot be settled by a Settlement Agreement?

There are some claims which cannot be waived even with a Settlement Agreement. This include some collective consultation failures (particularly, where there is a TUPE transfer or collective redundancy), some claims under the Agency Workers Regulation 2010 (although a COT3 agreement can be used instead in this case), claims that fall under the Trade Union blacklist regulations, and claims that are for statutory paternity, maternity or adoption pay.

Can your employer impose new post-termination obligations?

These can be introduced in a Settlement Agreement. However, your employer should provide a separate payment for any new restrictive covenants. Whether they are enforceable will depend on whether they are reasonable and whether your employer has a legitimate business interest to protect.

What are the penalties for breaking a Settlement Agreement?

A Settlement Agreement is legally binding, and there are serious implications if the terms are breached. If an employer breaks the agreement, the employee can take them to county court to claim breach of contract. If an employee breaches any of the material terms of their contract, the employer may be able to recover some or all of the money paid to the former employee as a debt. If you are concerned about one of the parties of a Settlement Agreement breaking the agreement, it is important to seek expert legal advice.

What happens if your employer breaches the Settlement Agreement?

If your employer breaches any terms of your Settlement Agreement, you need to contact your solicitor who signed this off. If your former employer has not paid any of the defined compensation, then you will be able to enforce the payment terms. The remedy for other breaches will depend on what type of breach there has been and the evidence you have to support your claim that there have been serious breaches.

What can I do if the Settlement Agreement is not paid on time?

If an employer fails to pay the Settlement on time then you should be able to claim breach of contract. You should consult the solicitor who signed off the agreement to enforce the terms of the payment.

What can you expect from your solicitor?

Your solicitor should advise you as to whether entering into the Settlement Agreement is the best outcome for you. If it is not, they may need to help you write a formal grievance letter and put forward a larger counteroffer than the amount of compensation already suggested. They will check the warranties are reasonable and advise you as to whether any further tax is due from you.

It is important that you instruct a specialist employment law solicitor. They should have experience running Tribunal cases so that they provide expert advice so you can make an informed choice about whether to accept this Settlement Agreement, or not.

How long does it take to negotiate a Settlement Agreement?

This depends on how straightforward the issues are. If the compensatory sum is generous and over and above your statutory and contractual rights, we can finalise your Settlement Agreement within days.

If we advise that changes need to be made to the wording of the Settlement Agreement, this needs to be sent to your employer and we are dependent on the speed of their response.

If the amount offered is clearly insufficient, then we can go back to your employer to negotiate more money. In many cases, we advise that you raise a formal grievance to put pressure on your employer. The timescale will then depend on the reasonableness of your employer in increasing your compensation.

Should I accept a Settlement Agreement?

Only you can decide whether you wish to sign the Settlement Agreement for a lesser sum, or whether you want to hold out so that we can increase your compensation or make sure that all your contractual rights have been included, such as bonus, pension contributions, car allowance, etc.

What happens if I refuse to sign a Settlement Agreement?

Settlement agreements are not compulsory and if an employee is not satisfied with the terms, compensation, or indeed anything else about the agreement they don’t have to sign.

However, refusing to sign could lead to an employer instigating alternative proceedings such as disciplinary action. The employee will also not receive the employer’s contribution to their legal fees.

What happens if you breach a settlement agreement?

Once a Settlement Agreement has been entered into it is legally binding. If you breach a Settlement Agreement, the other party may seek to enforce the terms of the agreement, or seek damages by bringing a breach of contract claim.

What happens after you agree a Settlement Agreement?

Settlement Agreements need to be signed off by an independent legal adviser. Your employer will usually pay an agreed sum to cover the costs of this independent advice. Once the Settlement Agreement has been signed by both parties it is legally binding.

How does a Settlement Agreement affect me getting another job?

In most situations, the existence of a Settlement Agreement will not have a great deal of impact on you getting another job. However, some agreements may contain ‘restrictive covenants’, that prevent you from working from someone else for an agreed period of time. If these restrictive covenants mean that you are unable to work in your industry for a time, then the compensation figure should reflect the loss of income you would experience.

Usually a Settlement Agreement will incorporate a clause stating your current employer’s willingness to provide you with a satisfactory reference. However, this is not a legal requirement so it is important to ensure this is included. It is also worth bearing in mind that a ‘standard reference’ merely states the employee’s job title and dates of employment, and that if it is important to obtain an enhanced reference you must negotiate this as part of your Settlement Agreement.

For specialist Employment Law advice on whether to accept your Settlement Agreement, contact us on01273 609911, or email info@ms-solicitors.co.uk.