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General mechanic2021-01-29T16:42:17+00:00

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Frequently asked questions.

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What is a settlement agreement?2022-07-02T12:30:33+00:00

An employment settlement agreement is a contract between an employer and an employee that is legally-binding. Under these types of agreements the employee generally agrees to receive some benefit (normally a sum of money, although this can include non-financial benefits as well) and, in return, they agree to not sue their employer (whether in the Employment Tribunal and/or in the civil courts). This is why such an agreement is called a “settlement agreement”: under the agreement the employee is agree to “settle” their right to bring claims against their (former) employer (this could include, for example, a claim for unfair dismissal, discrimination, harassment or victimisation).

We refer to these settlement agreements as “employment settlement agreements” in order to distinguish them from other types of settlement agreements that you might receive in other areas of law (for example, a divorce settlement agreement).

What are the legal requirements of a settlement agreement?2022-07-02T12:35:18+00:00

In order for an employment settlement agreement to be valid and enforceable it must must satisfy certain conditions (which are set out in s.203(3) of the Employment Rights Act 1996).

The legal requirements of a settlement agreement are as follows:

  1. The settlement agreement must be in writing;
  2. The agreement must relate to a “particular complaint” or “particular proceedings” (i.e. to defined claims that you are settling under the settlement agreement);
  3. You must have received legal advice from a relevant independent adviser (such as a specialist settlement agreement solicitor) on the terms and effect of the proposed agreement and its effect on your ability to pursue any rights before an Employment Tribunal;
  4. The legal adviser that you instruct must have a current contract of insurance, or professional indemnity insurance, covering the risk of a claim by you against your legal adviser in respect of legal advice given;
  5. The settlement agreement must identify the adviser; and
  6. The settlement agreement must stated that the conditions regulating compromise agreement/settlement agreements have been satisfied

If your agreement does not meet the above criteria then it will not settle your statutory claims – this would mean that you would technically be able to pursue your (former) employer for your statutory rights. However, the practical effect of doing so will probably be that you will have to pay back some or all of the payments made to you under the settlement agreement).

What are the circumstances under which I can seek a settlement agreement?2022-07-02T12:48:54+00:00

You may wish to seek a settlement agreement in a variety of circumstances, generally either when you want to leave your employment because you are unhappy, because your employer wants to terminate your employment, or where you have already left your employment and want to settle various claims you may have against your employer.

The following types of situations are circumstances which could lead to a settlement agreement:

  • If your employer has failed to pay you wages that you are due
  • If your employer has breached your contract of employment in some way (e.g. by failing to pay you a bonus or commission that you believe that you are due)
  • If you have been discriminated against at your job or harassed
  • If you have been victimised by your employer because you have raised a complaint
  • If your employer thinks that you are underperforming
  • If your employer thinks that you may have engaged in misconduct

Senior employees in organisations (such as executives or directors) may find that a restructure, merger or a change in strategy may lead to a situation where their continued employment is difficult. A natural solution to such an issue is for the senior employee and the employer to agree mutual termination terms, which can be arranged via an employment settlement agreement.

What are the advantages of a settlement agreement?2022-07-02T13:12:08+00:00

The main advantages of an employment settlement agreement are as follows:

  • You can use them to obtain a financial sum to compensate you for poor treatment that you have experienced at work (for example, if you have been discriminated against or have had your contract breached) without both sides having to go to the cost, stress, time and uncertainty of an Employment Tribunal claim
  • Settlement agreements are quite tax-efficient, in that you can receive the first £30,000 of the settlement amount tax-free
  • You can negotiate into the settlement agreement non-financial terms that are important to you (such as, for example, a reference that you are happy with, an internal or external announcement, or appropriate confidentiality clauses)
  • You can use a settlement agreement to negotiate a higher sum upon termination of your employment than you may have otherwise been entitled to receive (i.e. beyond your notice pay, holiday pay, and statutory redundancy pay (if applicable))
  • To allow unhappy employees an exit from potentially stressful and unpleasant situations without having to resort to litigation
What are the disadvantages of a settlement agreement?2022-07-02T19:30:20+00:00

The main disadvantages of a settlement agreement are as follows:

  • Your employer may not be willing to pay you what you think your claims are worth under the settlement agreement –  in this case, you will need to decide to accept (what you consider to be) an undervalue or to reject the settlement agreement
  • You may not be happy with the broad confidentiality clauses that tend to be used in settlement agreements
How much money will I receive under my settlement agreement?2022-07-02T19:37:11+00:00

The financial settlement you receive depends on many factors, including your job, your age, your seniority, the industry you are employed in, and what claims you might have as a result of your dispute with your employer.

Our experienced settlement agreement solicitors are expert negotiators and can advise you on what they think your claims are worth. They are also skilled at persuading employers to enter into settlement agreements where the employer may not otherwise with to.

Our settlement calculator provides general guidance as to what compensation you may be entitled to.

What financial payments can I expect to receive under my settlement agreement?2022-07-02T19:47:48+00:00

You can normally expect to receive the following financial payments under a settlement agreement:

  • Contractual payments payable to the date of termination;
  • Payment in lieu of notice (if you are not serving your notice period or being put on garden leave);
  • Holiday pay accrued but not taken as of the termination date;
  • Statutory redundancy pay (in a redundancy situation);
  • Compensation for termination of employment (also known as an ‘ex-gratia payment’ or termination payment);
  • Sums due in respect of bonus payments, share schemes, and/or long-term incentive plans (also known as ‘LTIPs’);
  • Additional payments for post-termination restrictions and/or new confidentiality clauses
What non-financial terms are normally included in a settlement agreement?2022-08-03T09:50:25+00:00

The following non-financial terms are common in a settlement agreement:

  • That you be provided with a reference by your employer after you leave your employment, as well as the form of the reference
  • Confidentiality terms, ensuring that you and your employer keep the terms of the agreement secret (subject to certain exceptions) after the agreement is completed (it is common to need to amend the confidentiality clause to make sure that it applies to both parties)
  • ‘No bad-mouthing’ clauses (more technically known as ‘non-derogatory clauses’) which prevent both you and your employer from saying anything negative about each other after (again, this is normally something that will need to be amended in the agreement)
  • Outplacement support – that your employer will pay for a third-party company to help you improve your CV and find a new job
  • That you’re able to keep company property in your possession – you can, in our experience, negotiate with your employer to keep the company mobile telephone or laptop in your possession, or to retain the mobile telephone number in your possession
  • Allow you to keep receiving certain work-related benefits – for example, extending the period of time that you are covered by medical insurance for or that your employer pays a certain sum into your pension to top up employers’ pension contributions
What should I do if I have been offered a settlement agreement?2022-08-03T10:37:12+00:00

If you have been offered a settlement agreement by your employer then you should do the following:

  1. Check, in writing, the exact terms of what you’re being offered by your employer – make sure that you and your employer are on the same page about what you’re being offered;
  2. Obtain a copy of the settlement agreement from your employer;
  3. Thoroughly check the settlement agreement to ensure that the terms that the offer your employer has made you is drafted into the settlement agreement;
  4. Speak to a specialist employment solicitor to discuss your situation and next steps;
  5. Consider whether you want to negotiate the agreement or to just proceed to complete it
Will I have to pay tax on the sums I am paid under the settlement agreement?2022-08-03T10:45:54+00:00

The short answer is that you will need to pay tax on some of the payments made under a settlement agreement but you will not need to pay tax on certain sums.

You will normally need to pay tax on the following sums:

  • Your notice pay (whether you’re being paid in lieu for your notice pay, you work your notice out, or you’re placed on garden leave);
  • Holiday pay;
  • Bonus payments; and
  • Any other payments that you’re contractually owed by your employer

You will not normally have to pay tax (or National Insurance contributions) on payments made as compensation for the termination of your employment (also known as ‘ex-gratia payments’) up to a total sum of £30,000. Any compensation paid over £30,000 will normally be subject to tax (but not National Insurance).

Payments made as compensation for injury to feelings are generally also not taxable (if the injury to your feelings relates to a detriment that you suffered prior to your dismissal).

Equally, payments made on account of a disability are also normally free of tax and national insurance.

Can my bonus or commission (or any other contractual payments) be included in the agreement?2022-07-02T14:59:27+00:00
Does my notice period affect what I should expect to receive under the settlement agreement?2022-07-02T14:59:52+00:00
What difference does my annual salary make to how much I should receive?2022-07-02T15:00:16+00:00
Does it make a difference to my payments under the settlement agreement if I am disabled?2022-07-02T15:10:34+00:00
Should I expect a higher payout if I have been discriminated against?2022-07-02T15:01:03+00:00
Does my age make a difference to how much I should expect to receive?2022-07-02T15:01:26+00:00
Does the size of my employer affect what I can expect to receive under an agreement?2022-07-02T15:01:50+00:00
Will I get more under the settlement agreement if I have worked for my employer for a long time?2022-07-02T15:02:15+00:00
Is there a minimum settlement payout that I should expect?2022-07-02T15:02:38+00:00
Is there a maximum settlement payout that I should expect?2022-07-02T15:03:04+00:00
What happens if I have already left my job or have started a new job?2022-07-02T15:03:24+00:00
What happens if I have already left my job or have started a new job?2022-07-02T15:05:05+00:00
My employer has already started a disciplinary process – does this make a difference?2022-07-02T15:05:27+00:00
What does “without prejudice” mean?2022-07-02T15:06:13+00:00
My employer has threatened a performance improvement process (or has started one) – does this make a difference?2022-07-02T15:05:51+00:00
What is a “protected conversation”?2022-07-02T15:06:40+00:00
What does “subject to contract” mean?2022-07-02T15:07:03+00:00
Can I expect a difference between what I would receive under a settlement agreement and what I could win in the Employment Tribunal?2022-07-02T15:07:26+00:00
What claims will I be expected to waive under a settlement agreement?2022-07-02T15:07:49+00:00
I have already started an Employment Tribunal claim – can I still settle?2022-07-02T15:08:18+00:00
Can I tell anyone about the fact that I have agreed a settlement agreement?2022-07-02T15:08:41+00:00
Will I get a reference under a settlement agreement?2022-07-02T15:09:04+00:00
Can I refuse to sign a settlement agreement?2022-07-02T15:09:33+00:00
Who will pay for the cost of the advice under the settlement agreement?2022-07-02T15:09:57+00:00


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