Settlement agreements: A JD Law guide

Transcription

1 Settlement agreements: A JD Law guide

2 Employment relationships do not always work out. Disputes between employees and employers arise for a variety of reasons. Often these disputes are dealt with between the employee and employer without the need for either party to take legal action. However, sometimes issues require formal legal agreements in order for both parties to move forward. Most commonly, this is in the context of a dismissal or resignation. Parting ways In such circumstances, an employer may decide to ask an employee to sign a settlement agreement to formalise their arrangements or leaving their employment. This guide provides general information only. It was prepared in March While every effort has been made to ensure that the content is accurate and up-to-date, nothing in this guide should be construed as representing legal advice. New beginning

3 What is a settlement agreement? What is included in a settlement agreement? A settlement agreement is a legally binding agreement between an employer and an employee in which an employee waives certain legal claims against the employer in exchange for something in return, normally a financial payment. There are various circumstances in which a settlement agreement may be entered into, such as: Redundancy; Mutually agreed termination; Dismissal; or To settle an Employment Tribunal claim. The advantage of entering into a settlement agreement for an employer is that it provides peace of mind and certainty that the employee cannot subsequently bring an Employment Tribunal or Court claim against the company. For an employee, the advantage is normally financial. However, employees also benefit from the certainty settlement agreements provide and the fact they do not have to go through an expensive and stressful legal process. Each settlement agreement will vary depending upon the facts of the case. However, there are some elements which will be common to most agreements, which include: The payments to be made to the employee (such as payments for redundancy, unpaid wages, bonuses, pay in lieu of notice and any holiday pay entitlement). Confidentiality requirements, which may permit the employee to tell people they have entered a settlement agreement, but not to discuss its contents, or may prohibit the employee from even mentioning that a settlement agreement has been put in place. The reference that will be provided by the employer upon request. Whether an announcement will be made to colleagues and clients. A mutual agreement that the parties will not make derogatory comments about each other. Details of the claim or claims the employee agrees to waive. Settlement agreements cannot be used to exclude liability for most personal injury claims unless knowledge of the potential personal injury claim exists as at the date of the settlement agreement. An employee who signs the agreement will also be able to pursue a claim if the employer breaches the contract, as well as in respect of any accrued pension rights.

4 What are the financial implications of a settlement agreement? The legality of settlement agreements It is a legal requirement that employees receive independent legal advice on the terms and effect of the settlement agreement. This is because the employee is compromising their rights by signing the agreement. The employer is not under any obligation to contribute to the employee s legal fees. However, as it is in the employer s interest that the employee signs, employers usually contribute to the employee s legal fees and often cover the full costs of advice in relation to the terms of the agreement. In general terms, the payments made to the employee in respect of salary and holiday pay and any other contractual payments will be subject to normal deductions for income tax and national insurance contributions. To be legally valid, the settlement agreement must comply with a number of conditions, including: It must be in writing. It must relate to a particular complaint. The employee must have received legal advice from an independent adviser. This is normally a solicitor although it can also be a trade union representative. The advice given will be on the terms and effect of the proposed agreement and its effect on the employee s ability to take a claim to an Employment Tribunal. The agreement must state that the conditions regulating settlement agreements have been satisfied. Ordinarily, employers will offer the employee an additional sum of money on an ex gratia payment or as compensation for the loss of their employment. The first 30,000 of such payments is tax-free. Anything over this threshold will be subject to income tax. If the employee receives a tax-free compensation payment, the employer will usually ask the employee to provide an indemnity against the risk that HM Revenue & Customs might decide that the payment does not truly represent compensation and should be taxed.

5 What happens if the employee refuses to sign the agreement? There is no obligation, legal or otherwise, on an employee to sign a settlement agreement that is offered to them. However, the employer will normally offer financial incentives to an employee to enter into such an agreement. If the employee elects not to do so, those financial incentives will usually be withdrawn and the employee may then have to face a redundancy or performance management process or seek financial redress through an Employment Tribunal claim. How can JD Law help? At JD Law, we regularly advise employers on the appropriateness of entering into a settlement agreement. We can help you with the preparation of the settlement agreement and assist with any negations on its terms. We advise employees on the terms on offer from their employer and will help employees to negotiate an enhanced package. For tailored advice on the law surrounding settlement agreements, or any other employment law matter, please contact us.

6 Contact us To find out how we can help you, please contact our employment law specialists: Julian Fidler Nick Stott JD Law LLP, Fourth Floor, Thavies Inn House, 3-4 Holborn Circus, London EC1N 2HA The content of this guide should not be considered by any reader to comprise full proper legal advice. All information accurate at the time of going to print.