Your settlement agreement - the key issues

Transcription

1

2 Your rights Settlement agreements are agreements governed by employment law statutes applicable in the UK. The legal system is designed to protect you from signing away valuable employment rights that you may not fully understand. Employees have rights such as the right not to be discriminated against on protected grounds and the right not to be unfairly dismissed. You cannot sign away these rights without first taking independent legal advice so that these rights can be explained to you. Our role as your legal advisers is to advise you on your employment rights before you sign them away. We will be clear in explaining your rights and forthright in helping you to protect them. We will also advise you on the terms of the settlement agreement and the financial settlement on offer. We understand the way in which employment tribunals calculate compensation and can advise you on the amount of compensation a tribunal is likely to award. What are the key issues? Compensation payment The most important aspect of any settlement agreement is the amount of compensation that the employer is prepared to agree to pay you to waive your legal rights. When deciding whether or not the amount is sufficient to compensate you for the termination of your employment, you need to understand how an Employment Tribunal would go about calculating any compensation payable to you. Most compensation is based on your financial losses. If you are unfairly dismissed the compensatory award will be based on your loss of earnings resulting from the dismissal. In addition, in an unfair dismissal case you are also entitled to receive a basic award based on your salary, age and length of service. This is very similar to the amount of statutory redundancy payable if you are made redundant. If you are discriminated against you may be entitled to receive an amount for injury to feelings calculated on a scale that reflects the seriousness of the discrimination. In any settlement agreement situation we will assess what is being offered to you and advise you on your potential entitlements if you decide to bring an Employment Tribunal claim rather than accept the sum on offer. We are able to negotiate with your employer in relation to the proposed settlement sum. 2

3 Taxation It is possible that the first 30,000 of a settlement payment under a settlement agreement can be paid tax free. This is a considerable bonus when agreeing settlement terms. However, only certain payments can be made tax free. The main payments made are: Redundancy payments, whether statutory, contractual or ex gratia, can be paid tax free. Payments in lieu of notice are generally taxable if there is a clause in your employment contract that gives your employer the right to make a payment in lieu of notice. If there is HMRC will presume that the payment is taxable and it is difficult to convince them otherwise. If your employer pays you in lieu of notice when there is no contractual right to do so, this amounts to a breach of contract and the payment can in most cases be made tax free. Ex gratia payments (i.e. payments to which there is no legal entitlement but which your employer might make to compensate you for terminating your employment) are not taxable. Payments made to enforce post-termination restrictions or confidentiality restrictions are taxable. In most circumstances, even where it is agreed that payments or some parts of the payments are not to be taxed your employer will insist on including a tax indemnity in the settlement agreement. This means that if HMRC decide that the payments are taxable your employer could claim the tax from you. As such, it is vital that the tax assessment is correct. E: employment@prolegal.co.uk 3

4 Full and final settlement clause In signing a settlement agreement you are agreeing to sign away your right to bring employment tribunal proceedings against your employer. Typically your employer will require you to sign an all-encompassing waiver covering all potential claims. There are exceptions to this, such as your right to make claims in relation to accrued pension rights. These cannot be waived, and we will usually ask for this to be excluded. Similarly, we will ask for latent personal injury claims to be excluded. It would not be fair to ask you to sign away your right to claim for injuries that you are not aware you have. Warranties and clawback clause Whilst settlement agreements give employers a high level of protection in relation to future claims, they are not watertight and there are issues that cannot be compromised, such as rights to claim a protective award for failure to consult in collective redundancy and transfer of undertaking cases. Employers will often want some form of comfort that you will not bring a claim even if you still have the right to do so. Your employer may ask you to warrant that you are not aware of any other claims and that even if you become aware of claims you will not seek to enforce them. Employers may ask you to agree to a clawback clause allowing the employer to be repaid the compensation sum in the event that you bring a claim. Such clauses are difficult to enforce as they may fall foul of legal rules that prevent employers imposing a penalty on you for breaching an agreement. Whether or not this kind of clause is enforceable is unclear, but it tends to have a deterrent effect. 4

5 Confidentiality and restrictive covenants Any post-termination restrictions in your employment contract that seek to prevent you from working for a competitor, soliciting or dealing with your former clients or poaching employees are only enforceable if your employment contract is not breached when you are dismissed. If your contract is breached (for example, if your employer has no right to pay you in lieu of notice but seeks to do so) then an additional payment will need to be made in order for the covenants to be enforced. Any such payment is fully taxable and it is important to ensure that a defined amount of the compensation payment is apportioned to the restrictions to avoid HMRC arguing that the whole sum is taxable. Similarly, any express confidentiality restriction may fall away if the contract is breached. In these circumstances the employer may wish to impose a new restriction on you. Even if it does not, there is an implied duty of confidentiality that will continue to apply. Settlement agreements and references If your employment is being terminated you will need to find another job and a reference from your previous employer is an important part of securing alternative employment. When negotiating a settlement agreement you have the ability to agree the content of the reference your employer will give to potential future employers. Most employers these days will give just the basic facts of employment in a reference: job title, start date, termination date. The reason for this is that it is possible for a former employer to be sued for negligence if it is careless in giving a reference. This has led to employers being cautious about the references they give. You may wish to agree a more substantial reference as part of the settlement agreement terms. Many employers will resist this but it can be an important part of agreeing a settlement. E: employment@prolegal.co.uk 5

6 Settlement agreements and legal costs For your settlement agreement to be valid, you need to have taken independent legal advice before signing the agreement. In most cases, your employer will want the certainty that the agreement is legally enforceable in order to prevent you from taking any action against it in an employment tribunal. There are exceptions, but most employers will pay for you to take legal advice on a settlement agreement as it is in their interests to get you to sign away your legal rights. HMRC allows your employer to pay your legal costs on your behalf and for this not to be a taxable benefit so long as the costs relate to advice on the termination of your employment and the entering into of the settlement agreement. This is therefore also a tax efficient way of structuring your settlement payment. 6

7 Louise qualified in 2002 and has spent the past 10 years dealing with Employment Tribunal claims on behalf of both Claimants and Respondents. She has a particular interest in claims involving Discrimination and Whistleblowing. She also has experience in the Employment Appeal Tribunal and Court of Appeal. Louise has appeared as an advocate in the Employment Tribunal on many occasions and as such applies her knowledge of the practice of the Tribunals to ensure that cases are effectively prepared for hearing. Louise Taft Senior Employment Solicitor DD: M: The Tribunal claims team is structured to use the experience of our senior solicitors but ensure that work is carried out cost effectively. Our systems ensure that we work efficiently to minimise cost to you whilst ensuring that you benefit from the extensive experience within the team. Advocacy can either be carried out in house or, where more cost effective for you, by Counsel. Our in house experience allows us to give you the best possible advice as to when it is appropriate to settle a case and at what level. If we believe settlement is the most appropriate route for you, we will work to ensure this is achieved as soon as possible so as not to incur unnecessary costs. We ve been advising on settlement agreements over the last three decades. We help people all over the country and we re available 24/7/365. Call us for a free consultation on or free phone , make an enquiry via employment@prolegal.co.uk or visit our website 8