What employees need to know about Settlement Agreements

Settlement Agreements at Austen Jones SolicitorsSettlement Agreements (previously known as Compromise Agreements) are used to end an employment relationship in a mutually agreed manner. A Settlement Agreement will often be offered by an employer when the employer feels vulnerable i.e. when there is a dispute with the employee about his/her employment and its termination and the employer is concerned that it might be sued.

What is a Settlement Agreement?

Essentially, in a Settlement Agreement the employee agrees to relinquish all rights to sue the employer in any forum – i.e. in court or at an employment tribunal – in return for which the employer pays the employee a sum of money and/or agrees other terms.

A Settlement Agreement is a legally binding document if concluded in the correct manner: it must be in writing; it must relate to a particular complaint; the employee must take independent legal advice; the Settlement Agreement must identify the independent legal adviser who must complete an ‘Advisor’s Certificate; it must state that the adviser has given the employee advice and is covered by a contract of insurance; and it must also state that the statutory provisions which govern Settlement Agreements have been met.

What advice regarding your Settlement Agreement can Austen Jones Solicitors provide?

Many firms will limit their advice to informing the employee that they are relinquishing all rights to sue, in return for a termination payment. Austen Jones Solicitors goes further than that. There is a term in nearly all Settlement Agreements advising the employee that any monies they receive will have to be repaid if certain terms of the Settlement Agreement are broken – so it is absolutely vital that nothing is overlooked. We scrutinise the Settlement Agreement and advise if there is any term in there which could remotely prejudice the employee’s position. For example, some Settlement Agreements contain a term that the employee promises that he/she has not already been offered a new job, or in some cases even that there have been no discussions with any third party which might conceivably lead to an offer of a role which could earn the employee money. Such a term is unreasonable, as in many cases it is likely that the employee will have known for some time that their employment is ending – or is at risk of ending – and will have started job hunting i.e. they could already be in breach of the term.

Can a conversation about a Settlement Agreement be used against employer/employee?

The parties can have ‘off the record’ conversations regarding the termination of employment in the knowledge that it will be “protected” under Section 111A of the Employment Rights Act 1996.

An employer must ensure it refers to s.111A in any settlement correspondence. When negotiating a Settlement Agreement, it should mark all correspondence and state all conversations are “without prejudice”. However, simply marking something “without prejudice” will not be enough to ensure the ‘privilege rule’ applies and that it is indeed off the record. The correspondence or discussion must be a genuine attempt to settle an existing dispute, in order to qualify for “without prejudice” protection.

Critically, the “protected conversation” provision cannot be relied upon in a discrimination or victimisation claim. Just this week, we recovered £17,000.00 for an employee who claimed she was selected for redundancy because of her disability i.e. that she had been discriminated against. Damningly, the minutes of the meeting in which she was dismissed recorded that when our client asked if there were any other roles she could fulfil, she was informed immediately – without any investigation or further discussion – that there were none. We argued that that was indicative of a decision having already been taken to dismiss her….due to her disability (there were other factors in support). Unsurprisingly, the employer did not want the tribunal to read the minutes so argued that the meeting was ‘protected’. However, they were unaware that the minutes of the meeting could be relied upon in the tribunal, given the claim was for discrimination.

What constitutes a reasonable settlement?

The employer usually agrees to make a contribution to the cost of obtaining advice on the Settlement Agreement – a couple of hundred pounds is offered. Austen Jones Solicitors can advise on the effect of the Settlement Agreement for whatever sum the employer offers, but if an employee wants advice on the reasonableness of the settlement, that may incur further charges. That is because the deal on the table should offer the employee reasonable compensation for giving up the right to claim, so a full factual matrix must be obtained from the employee to be able to advise on the strength of the claim against their employer.

What constitutes a reasonable sum will vary considerably depending on the type of claim, the strength of the case and the employee’s position in the business. For example, an employee on a modest salary who has worked for the employer for only a short time and who has been treated reasonably – albeit the employer might have failed to follow all recommended guidelines – will have a relatively weak claim and the Settlement Agreement will reflect that. However, a director on a substantial salary who has plainly been discriminated against will have a robust claim worth many tens of thousands of pounds.

Non-money terms

The employee can ask for the employer to agree in the Settlement Agreement to provide a positive reference – the actual wording of the reference can be set out in the Settlement Agreement.

The employer might agree to allow the employee to retain a company phone or laptop.

The Settlement Agreement might provide for the employer agreeing to offer outreach counselling and/or career coaching.

What are the tax implications of Settlement Agreements?

Any payments due to an employee under a contract of employment – e.g. salary or holiday pay – will be subject to the usual tax and national insurance deductions. However, any payment of compensation for loss of employment which includes redundancy or ex-gratia payment – of up to £30,000 – is tax free.