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An Employee’s Guide to Negotiating a Settlement Agreement

An Employee’s Guide to Negotiating a Settlement Agreement

Whether you’re feeling undervalued at work or your boss is unhappy with your performance, there are numerous reasons why problems may arise between you and your employer. Through the use of performance management, disciplinary or grievance procedures, mediation or conciliation, the majority of these issues can be resolved with open and honest conversations. However, if you are looking to bring your employee-employer relationship to an end in a mutually agreed way, a Settlement Agreement is a handy tool to use.

What is a Settlement Agreement and when is it used?

A Settlement Agreement (formerly known as a compromise agreement) is a contract between you and your employer in which both parties are legally obliged to stick to. They are typically used in situations where both parties feel their employment relationship isn’t working and a ‘clean break’ is the best way forward. In these circumstances, both you and your employer can agree on the basis for bringing your employment with the company to an end.

Settlement Agreements can also be used to reach an agreed conclusion to a dispute in the workplace which does not have to result in your employment coming to an end.

It is important to note that Settlement Agreements are a process of discussion and negotiation, in which both parties are not obligated to accept the initial terms being offered. Obtaining specialist legal advice from a qualified employment lawyer is always recommended to ensure you get the best result for you.

Negotiating a Settlement Agreement – what should be included in a Settlement Agreement?

Settlement Agreement negotiations are often confidential so that, if an agreement is not reached, the negotiations cannot be used as evidence in claims made before an employment tribunal or other court proceedings. Such negotiations only remain confidential so long as your employer behaves appropriately in accordance with Section 111A of the Employment Rights Act 1996 in inviting you to a meeting and proposing a Settlement Agreement. However, the standard terms of a Settlement Agreement may include the following:

  • Your outstanding balance of salary, bonuses, commission and holiday pay
  • A termination payment from your employer for agreeing to terminate your contract
  • A Confidentiality or Non-Disclosure (NDA) clause
  • A promise by your employer to provide a reference about you, if asked to do so
  • A contribution from your employer towards your legal fees

If you are considering making a formal complaint against your employer and they ask you to sign a Settlement Agreement, you are in a strong position to negotiate a payment amount. You should consider the vulnerability of your employer, for example, whether they would need to defend litigation or deal with bad publicity if you were to pursue a claim. On the other hand, it may not be about the money for you but rather about getting a written apology or positive reference from your employer.

Whatever your reasons, you should always instruct a highly skilled employment lawyer if you’re unsure what you want to be included or how to negotiate the terms of a Settlement Agreement. To get qualified legal guidance from one of our employment solicitors today, get in touch with us here.

Settlement Agreement terms – are they legally binding?

Once the discussions and negotiations conclude and, if both parties are happy to sign a Settlement Agreement, various conditions must be met for the contract to be legally binding. When you’ve reached an agreement with your employer, and it’s in writing, you should also ensure:

  • the agreement relates to the dispute you’re having,
  • you have received legal advice from an independent solicitor,
  • the agreement states the name of the legal adviser,
  • sets out what you and your employer agree to do, and
  • says that the agreement meets the legal requirements about Settlement Agreements.

REMEMBER – if the agreement fails to meet the legal requirements, you can then still bring a claim forward to an employment tribunal.

Benefits of a Settlement Agreement to resolve a dispute

A Settlement Agreement can allow you to end an employment relationship that is no longer operating well in a dignified way. It can help you avoid wasting time and money that both parties are likely to endure should they go to an employment tribunal. If you are looking for something to take forward into your new place of employment – such as a good reference – this can also be provided through a Settlement Agreement.

Are Settlement Agreements tax-free?

Although a Settlement Agreement is considered a legal contract that puts a stop to any potential claims against your employer, it can also be thought of as a tax document that records how payments are treated for tax purposes. How Settlement Agreement payments are treated for tax purposes will depend on what kind of payment they are.

All Settlement Agreements require employees to indemnify their employer on any outstanding tax after termination. As the employee, you are expected to pay any excess tax, therefore understanding what your tax implication will be for each type of payment is crucial. There are various payments you could be offered; from contractual to extra payments such as ex gratia (also known as a gift). Below are the key ones you should be aware of:

Ex-gratia payments

If your employer has offered you a Settlement Agreement, there’s a chance you may also be offered an ‘ex-gratia termination payment’. These types of payments are usually given as an incentive to settle any potential employment tribunal/county court claims. Generally, employers can pay the first £30,000 compensation for the Settlement Agreement tax free,

This means that any termination payments above the first £30,000 are taxable, regardless of what tax band your total earnings fall under.

REMEMBER – the tax on Settlement Agreements differ according to a range of considerations. The tax-free limit will not apply to all payments.

What happens when I’ve been made redundant?

Both contractual and statutory redundancy payments are also tax-free up to £30,000 as a redundancy payment is intended to relieve any suffering as a result of the loss of employment and income, rather than considered as earnings.

REMEMBER – a redundancy payment can only be made when there is a genuine redundancy situation. Therefore, it is essential to know the reason why your employer is offering a Settlement Agreement, especially when it involves you leaving the company.

Payment in lieu of notice (PILON)

If your employer is offering you PILON in a Settlement Agreement, then that tax is treated in the same way as it would if you worked during your notice period. In a Settlement Agreement, employers are required to split a termination award between amounts that are taxable (such as the PILON) and amounts that are subject to the £30,000 tax exemption.

What about pension contributions?

HMRC treats payments made direct into pension schemes as separate from the £30,000 exemption, meaning they are not subject to tax, so long as you comply with the rules about getting tax relief on payments into your pension.

Will salary, bonuses or benefits be taxed?

Your usual wages are taxable as they are when they are part of your standard earnings. The same rules apply for any holiday pay. You cannot shift a bonus payment due on termination into the tax-free exemption by referring to it as part of your compensation.

Top 5 tips for Settlement Agreements

With the above information, you should now have a better understanding of what a Settlement Agreement is and how to negotiate the terms of the contract to suit you. If your employer has offered you a Settlement Agreement, our top five tips to remember are:

  1. Settlement Agreements are voluntary and open for negotiation: Regardless of what is being offered by your employer, you should never forget that you are not legally obliged to agree and sign the Settlement Agreement. You can enter into a process of negotiation to obtain a settlement that is more in line with your interests, or simply refuse the agreement terms.
  2. Legal advice is not optional: For a Settlement Agreement to be valid, it is essential to get independent legal advice. A Settlement Agreement is only enforceable if the adviser signs to confirm that an insured practising solicitor has provided you with legal advice where necessary.
  3. A Settlement Agreement does not always mean dismissal: If you have been asked to accept a Settlement Agreement, it doesn’t necessarily mean your employment has ended. You employer may wish to change a term of your employment in a way that could otherwise be a breach of contract, or perhaps you have raised a grievance about your work that your employer has recognised and wants to settle without going to an employment tribunal.
  4. Settlement Agreements are more flexible than a tribunal ruling: Whether you were prepared for a discussion about a Settlement Agreement or not, there are several advantages to negotiating a Settlement Agreement that you would not get at an employment tribunal. For example, a tribunal cannot order your employer to apologise or give you a reference.
  5. Payments under Settlement Agreements can be free of tax: The first £30,000 of payment in respect of the termination of your employment is typically tax free and National Insurance, however, salary, bonus and holiday pay are all taxable.

Contact our specialist Settlement Agreement lawyers – dispute resolution experts

We specialise in employment problems and Settlement Agreements, professionally negotiating your position so that you can leave on terms that suit you. If you have been offered a Settlement Agreement from your employer and are unsure how to negotiate the terms, speak with a member of our specialist employment lawyers today on 020 3856 8156 or by completing the online enquiry form.

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