FAQs: Settlement Agreements for Employers

1. Why would you ask your employee to enter into a Settlement Agreement?
2. How do you know that you are offering a fair sum in the settlement?
3. What does a “protected conversation” mean?
4. How long does your employee have to decide whether they want to accept the Settlement Agreement?
5. How much should you contribute towards your employee’s legal fees?
6. Why does your employee need their own solicitor?
7. Can you or your employee pick the reason for them leaving your company?
8. Should your employee’s notice pay be paid tax-free?
9. Can you ask your employee to enter into new post-termination restrictions when they sign the Settlement Agreement?
10. Can your employee tell people about the agreement one they’ve entered into it?
11. Do you also need to agree to a confidentiality clause as well as your employee?
12. How much will it cost you to seek legal advice?
13. What should you expect from your solicitor?

Why would you ask your employee to enter into a Settlement Agreement?

By signing a Settlement Agreement and accepting the settlement terms, your employee forfeits their right to make a claim against you in a Court or an Employment Tribunal for all claims listed in the Agreement. This means that all possible claims against you need to be individually listed in the Settlement Agreement. The only exception where your employee would not waive their right to bring a claim, having already signed the Settlement Agreement, is where an employee is induced into entering into a Settlement Agreement and the facts have been misrepresented. For example, where the employee is told that their job is redundant but it then transpires that their job has been given to someone else.

How do you know that you are offering a fair sum in the settlement?

The amount in the Settlement Agreement will depend on the circumstances surrounding the reason why termination is being offered. Your employee will go through the background with their solicitor to find out what, if any, potential claims they may have against you. This should also establish whether the sum offered compensates them for the rights that they are giving up. Another consideration might be how long it would take your employee to find another job if this is a situation where you are compensating them for their loss of earnings.

What does a “protected conversation” mean?

A protected conversation allows you and your employee to have confidential pre-termination settlement discussions without either of you being able to use these discussions against the other in any subsequent Employment Tribunal proceedings. This protection applies to ordinary unfair dismissal claims only, not any other claims such as discrimination. You may also lose this protection if there was any evidence of you behaving improperly and putting undue pressure on your employee.

How long does your employee have to decide whether they want to accept the Settlement Agreement?

According to ACAS guidance you should give your employee a minimum of 10 days to decide whether they want to accept a Settlement Agreement. You should not act improperly by putting undue pressure on your employee to accept a Settlement Agreement. For example, by threatening any unfair course of action if they turn this down.

How much should you contribute towards your employee’s legal fees?

You will usually contribute between £300.00 and £500.00 plus VAT towards the cost of your employee obtaining independent legal advice. This is normally sufficient for a straight forward issue. If there is a lengthy and complicated background, which their solicitor will have to go through, it may be appropriate to offer a higher contribution.

Why does your employee need their own solicitor?

Because it is a legal requirement – otherwise the Settlement Agreement would not be enforceable. The employee must have their own independent adviser to sign the Agreement to confirm that independent advice has been given. Advice can only be given by a qualified lawyer or a certified trade union official or advice centre worker. Any adviser must have indemnity insurance.

Can you or your employee pick the reason for them leaving your company?

It is not necessary to give any reason other than “termination due to mutual agreement”. If there is a genuine redundancy situation, or there is a possibility of a redundancy situation, your employee may ask you to specify that the reason for leaving is redundancy. This might assist them if they needed to make a claim on their mortgage protection insurance policy.

Should your employee’s notice pay be paid tax-free?

If they are working their notice, then notice pay will have tax and NI deducted automatically through payroll. If you are intending to pay them in lieu of notice and you have included a payment in lieu of notice (PILON) clause in their employment contract, their notice will be subject to tax and national insurance.

If there is no payment in lieu of notice clause in their contract, you can agree to pay their notice as a gross sum. However, if you normally make these payments as an automatic response to termination, the HMRC may deem this payment to be taxable. In any event, your employee will normally be required to agree to be responsible for any further tax or national insurance contributions that are due.

Can you ask your employee to enter into new post-termination restrictions when they sign the Settlement Agreement?

Post-termination covenants can be introduced in a Settlement Agreement. You will need to provide your employee with a separate payment for any new post-termination restrictions. This is usually just a nominal taxable sum such as £200.00. Your employee may expect a larger compensatory payment, however, in order to enter into restrictive covenants. Whether these new restrictions are enforceable will depend on whether they are reasonable. They should only protect your legitimate business interests and not prevent your employee from working.

Can your employee tell people about the Settlement Agreement one they have entered into it?

Settlement Agreements usually include a confidentiality clause and your employee will not be able to disclose its terms to any third parties. Normal exceptions include your employee’s immediate family, professional advisers and HMRC, as long as they agree to keep the contents of  this Agreement confidential.

Do you also need to agree to a confidentiality clause as well as your employee?

Most Settlement Agreements include a standard confidentiality agreement for the employee. In some cases, it will also be important to your employee that they have an assurance that the circumstances and/or the terms of the Agreement will be kept confidential by you. This may require a mutual confidentiality clause whereby you agree to use your best endeavours to ensure that you and your employees don’t disclose these details to anyone.

How much will it cost you to seek legal advice?

Solicitors usually charge between £750.00 and £1,500.00 plus VAT to draft a Settlement Agreement depending on the number of issues that have to be dealt with. Any further costs will then be dependent on the amount of legal input required to negotiate with your employee’s solicitor to ensure it is signed off. The aim should be to reach an agreement whilst retaining all relevant clauses to protect your business.

What should you expect from your solicitor?

Your solicitor will draft a Settlement Agreement which ensures that once signed by your employee and their solicitor, your business is fully protected and not at risk of claims. Penalties can be set out whereby your employee would have to repay the compensatory sums if they breach the terms of the Settlement Agreement. Where you are concerned that your employee may not be aware of or will not adhere to post-termination restrictions, the Settlement Agreement can repeat these to provide further protection to your business. It is important that you instruct a specialist Employment Law solicitor. They should have experience of running Tribunal cases so that they can identify and include relevant terms in the Settlement Agreement to protect your business.

If you would like to find out more about offering a Settlement Agreement, contact us today on 01273 609911, or email info@ms-solicitors.co.uk.