A Settlement Agreement is a written agreement entered into between an employer and employee at the end of the employee’s employment.
The basis of the Agreement is that the employee receives a financial sum (or other consideration) in return for agreeing not to continue with or commence any claim against the employer.
Legal Advice
In order for the Agreement to be valid it must be in writing and the employee must receive legal advice from an independent adviser whose advice is covered by professional indemnity insurance.
We are able to advise employers and employees regarding the terms of a Settlement Agreement. If you are an employer and would like advice regarding possible termination of an employee’s employment or the drafting of the terms of a Settlement Agreement, please do not hesitate to contact us.
If you are an employee and would like advice on the possible termination of your employment or other issues at work, we can assist. If you have been or are expecting to be presented with a Settlement Agreement, we are very experienced in providing advice on those documents. The employer will usually make payment for such legal advice, the amount of which is normally set out within the Agreement. We will almost always be able to keep our fees to the amount set out in the Agreement.
Compensation Payment
The Agreement should set out all the payments to be made to the employee. Where the Agreement is being entered into before the termination of employment, these should include payments of salary and other benefits up to the termination date.
In the event that the employee has been made redundant, the employee is entitled to a minimum statutory redundancy payment if they have been employed for two years or more. The amount of the statutory payment will depend on the age of the employee, the length of employment and the employee’s week’s gross pay as follows:-
- an employee aged 18 or over is entitled to half a week’s pay for each year worked;
- an employee aged 22 or over is entitled to one week’s pay for each year worked;
- an employee aged 41 or over is entitled to one-and-a-half week’s pay for each year worked.
The total number of years employed is subject to a maximum of 20 and there is a statutory maximum for each week’s pay.
The first £30,000 of the compensation payment may be paid to the employee without the deduction of tax. However, it is likely that in return the employee will have to give a tax indemnity to the employer in the event that the payment is questioned by HM Revenue & Customs. There is no basis on which a genuine termination payment should be questioned in that respect.
Claims
Settlement Agreements are the only means whereby an employee can waive statutory claims against his/her employer outside ACAS or Tribunal proceedings.
The Settlement Agreement usually provides a long list of statutes under which the employee agrees not to bring a claim. This is likely to include claims under the anti-discriminatory laws such as the Sex Discrimination Act 1975, Race Relations Act 1976, Employment Equality (Age) Regulations 2006, Disability Discrimination Act 1995 as well as claims for breach of contract, unfair dismissal etc.
However, an employee is generally permitted to bring a claim against the employer for accrued pension rights and any unknown personal injury. Moreover, an employee may bring a claim against the employer if the employer breaches the terms of the Settlement Agreement.
Other terms
It is common practice for other terms to be included in the Settlement Agreement. These may include a warranty from the employee to return the employer’s property on or before the termination date; to keep the terms of the Agreement confidential; and not to make any derogatory or disparaging statements about the employer and its employees.
Employees are also often required to warrant that they have not committed a repudiatory breach of the terms of their contract of employment. This is because the employer may be entitled to terminate the employee’s employment without notice or making certain payments if the employee had committed such a breach.
Without Prejudice and Subject to Contract
The Agreement is usually marked “Without Prejudice” and “Subject to Contract”. This means that until the Agreement is entered into, is not possible to rely on the terms of the Agreement in any proceedings and either party may decide not to proceed with it any further.
This document is for general information only and is not intended to provide legal advice. Dixon Ward accepts no liability in connection with any loss suffered as a result of reliance on the information contained in this Factsheet. If you require further legal advice, please get in touch with one of our specialist lawyers.
