What is a settlement agreement?
A settlement agreement is a legal document that an employer may give to an employee. Its purpose is to ensure the employee gives up the right to bring claims against their employer in an employment tribunal or a court.
In return for agreeing to give up their rights to claim against the employer, it is usually the case that the employer will offer the employee a sum of money. Sometimes this is broken down into a taxable amount and a separate sum that is paid tax free.
Settlement agreements are normally used when an employer is terminating an employee’s employment, such as for redundancy, for example, but they do not always have to be used for ending employment. Sometimes they can be used for settling specific claims whilst employment continues or where the parties agree major changes to the employment contract that would otherwise have enabled the employee to bring a claim.
For a settlement agreement to be legally enforceable, it has to comply with certain requirements. One of these key requirements is that the employee obtains advice on the effects of signing the agreement from a qualified independent adviser, which is usually a solicitor.
Steps to take when negotiating your settlement agreement
Settlement agreements come about in many different circumstances. In some instances, the employer may present the employee with a proposal that is stated to be non-negotiable or the offer may be so favourable that the employee just wants to accept it.
Yet there are other situations where an employee may feel that the employer’s offer is too low or they may object to some of the other provisions in the settlement agreement. It can often be difficult for an employee to know whether a monetary offer is reasonable or whether they are being presented with a fair deal.
Sometimes an employee may be told that they are going to receive a sum of money tax free, only to then find that when the settlement agreement is drawn up, the payment is potentially taxable and the employee is being required to pay any tax that is due on the payment.
Speak to a settlement agreement solicitor
Sometimes solicitors who are not employment law specialists can end up advising employees on their settlement agreements. The concern here is that the solicitor may just focus on the basic advice and not offer a more in-depth service under which the fairness of the offer is also analysed.
As an example, we have advised several clients over the past few months who have been promised a tax free payment by their employer but when we have gone through the settlement agreement in detail with the employee, we have discovered that the taxable payment in lieu of notice has been rolled up into a supposed tax free payment. This not only breaches the relevant tax rules but also then presents a major risk for the employee if they have agreed to be responsible for the payment of any tax that is deemed payable by HMRC.
Equally, sometimes holiday pay, salary up to the leaving date and the payment of outstanding bonuses can be overlooked. Most settlement agreements include a clause stating that everything agreed between the parties is contained in the agreement itself. This means that if the agreement does not specify that certain other payments will be made, the employee would have no way of enforcing the payment of those sums. Employees may think that an email from HR is legally enforceable in itself, whereas in fact the settlement agreement will usually override what is set out in separate documents, such as emails.
For all these reasons, an employee with a settlement agreement should seek expert legal advice from an employment law specialist. The employer usually agrees to cover the reasonable cost of the advice on behalf of the employee. If there are amendments required to the settlement agreement, these can be raised with the employer by your solicitor in a practical and straight-forward way that seeks to resolve the matter swiftly and without a lengthy process.
Do we have to meet a solicitor face to face to get the advice?
No, nowadays many clients whom we advise on settlement agreements are advised either by telephone or video-call, such as via Zoom or Teams. Employers usually accept electronic signatures on settlement agreements. Many prefer an emailed electronic copy of the document itself rather than a hard copy. The Covid-19 pandemic has only served to hasten this change in the way the advice is given and how the documents are signed.
Of course, we can still meet clients face to face to give them advice if that is their preference, but it is no longer the only option in circumstances where the employee often wants advice as soon as possible and with as little inconvenience as possible.