What is a settlement agreement?
A Settlement Agreement (formerly known as a Compromise Agreement) is a legally binding agreement between an employee and employer. This usually provides for a severance payment by the employer in return for an agreement not to pursue any claims in a Employment Tribunal or a Court. The employer will usually require the employee to keep the terms, for example the amount and the surrounding circumstances of the contract’s termination, confidential.
Why do employers use Settlement Agreements?
Employers will offer a Settlement Agreement when they want to terminate a contract on terms mutually agreed with an employee. This is so that there is a clean break with no opportunity for an employee to take them to Court or a Tribunal for more money.
There is a range of scenarios in which Settlement Agreements are used. They usually apply where the employer does not want to follow what could be a long, drawn-out process, such as a performance review or a full redundancy process, before being able to terminate. Also, where an employee already has issues about discrimination or has raised a grievance, the employer may want to circumvent a claim for constructive dismissal and/or discrimination.
So how do I know if I have been offered a Settlement Agreement?
In order for a Settlement Agreement to be valid it must satisfy certain formalities.
It must be in writing and they usually contain some form of payment to the employee.
The agreement must relate to a particular complaint or proceedings.
The employee must have received advice from a relevant independent adviser, such as a lawyer or a certified and authorised member of a trade union. (Any costs related to the legal advice is usually payable by the employer).
If it does not contain the above, it is likely that it is not a Settlement Agreement.
What about tax on the settlement sum?
There is a specific tax law which allows the first £30,000 paid as compensation for loss of employment to be tax free. So any termination payments in excess of the first £30,000 are taxable at whichever tax band your total earnings fall under.
Since 6th April 2018, all payments in lieu of notice (PILON), including payments where there is no contractual PILON power, are now subject to income tax and class 1 NICs.
Why do I need a solicitor?
– An agreement whereby you waive your rights to bring an employment claim can only be recognised in law if a solicitor or certified trade union or adviser signs it off.
– A specialist employment solicitor will advise on the merits of a claim and the amount of money an employee would be likely to receive at an Employment Tribunal.
– A specialist employment law solicitor will also identify any discrimination against an employee of which he/she might not be aware.