Increase In Settlement Agreements Due To Economic Conditions

Force Majeure

Increased cost pressures on businesses in certain sectors across the UK mean that some employers are looking to reduce their workforce numbers and this seems to have led to an increase in employees being offered settlement agreements.

Below, we have answered some questions about settlement agreements that employees often ask.

What is a settlement agreement?

In employment law, a settlement agreement (formerly called a compromise agreement) is a legally binding contract under which an employee agrees to give up certain employment rights and not take legal action (e.g. an Employment Tribunal claim) against his/her employer or former employer, usually in return for financial compensation.

Settlement agreements are often used to end an employment relationship by mutual agreement or settle an ongoing dispute.

What does a settlement agreement generally cover?

Different settlement agreements contain different clauses, depending on the circumstances. In general, however, a settlement agreement will cover issues such as:

  • Leaving arrangements (e.g. the date on which the employee’s will end and whether or not he/she will have to work a notice period);
  • Money payable to the employee;
  • Tax treatment of money payable to the employee under the agreement;
  • A waiver by the employee of claims against the employer (e.g. unfair dismissal, wrongful dismissal, breach of contract, unpaid wages, discrimination etc.);
  • Confidentiality;
  • References;
  • Legal advice; and
  • Return of employer property.

What are the benefits of agreeing to a settlement agreement?

A settlement agreement can offer benefits to both employers and employees. For employees, potential benefits include:

  • Compensation (which may be tax-free up to £30,000);
  • No need to pursue expensive litigation; and
  • Reputational protection.

What is a ‘protected conversation’?

Where there is no existing dispute, an employer (or employee) can make an offer in the form of a ‘protected conversation’ to end the employment relationship on agreed terms, on a confidential basis, and that offer cannot then be used as evidence in an ordinary unfair dismissal claim to an Employment Tribunal.

What is a ‘without prejudice’ conversation?

Where there is a dispute (e.g. where legal proceedings are contemplated or have begun), a ‘without prejudice’ conversation can take place. Things said by one party to another in a without prejudice conversation cannot be used as evidence in future legal proceedings (i.e. they are effectively ‘off the record’) as long as they are said for the purpose of a genuine attempt to reach a compromise or settle a dispute.

Are payments as a result of a settlement agreement tax-free?

Certain non-contractual termination/compensation payments in settlement agreements can be paid tax-free (and without deductions of National Insurance contributions) up to a threshold of £30,000. However, the £30,000 exemption does not apply to all payments in settlement agreements and the tax implications of any payment should be considered carefully.

Do I have to accept the settlement agreement offer?

No, if you are not happy with the terms that your employer/former employer has offered, then you do not have to sign the settlement agreement.

You may feel that you have been given an unreasonable ultimatum by your employer/former employer or are being pressured into signing the settlement agreement. The way that your employer/former employer conducts itself in the way it presents the offer and options available to you should not result in you being subjected to undue pressure or improper behaviour.

If negotiations are unsuccessful and you decide not to sign the settlement agreement, you may have grounds to bring a claim against your employer/former employer in an Employment Tribunal. It is important to remember that there are strict time limits for bringing Employment Tribunal claims (generally, three months less one day from the date of termination/act of discrimination).

Is there a time limit by which I need to accept the settlement agreement on offer?

There is no strict legal time limit, but Acas guidance says that employers ought to give their employees a minimum of 10 days in which to decide whether or not they wish to accept a settlement agreement on offer. Your employer/former employer should not pressure you into signing the settlement agreement, or ask that you agree to it immediately.

Do I need a solicitor to advise me on my settlement agreement?

In order for a settlement agreement to be legally binding, you must obtain independent legal advice on its terms and effect.

It is important that you understand the legal effects of the settlement agreement and the impact on your employment and finances, as once you have signed it, you cannot change your mind.

Who pays for the legal advice that I need to take on my settlement agreement?

It is usual for the employer/former employer to contribute to the employee’s legal fees under the terms of the settlement agreement. They tend to offer a fixed sum, which may be sufficient to cover advice on a straightforward settlement agreement, where the employee is happy with the terms of the offer.

Where you require legal assistance in improving the terms of the settlement agreement, or if the matter becomes contentious and it looks like your fees will exceed the contribution on offer, your solicitor may seek to negotiate a higher contribution from your employer.

Can restrictive covenants be included in a settlement agreement?

Yes. Restrictive covenants are designed to protect an employer’s business interests when an employee leaves. A restrictive covenant or post-termination restriction could prevent you from:

  • Competing with your former employer for a certain period of time;
  • Approaching or dealing with your former employer’s customers for a certain period of time; or
  • Poaching other members of staff to join you at a rival enterprise.

However, for a restrictive covenant to be legally enforceable, it must meet certain tests. Broadly speaking, it will need to be no more restrictive than necessary to protect your former employer’s legitimate interests.

How Nelsons can helpsettlement agreements

Zara Gasztowicz is an Associate and Solicitor in our expert Employment Law team

If you would like any advice in relation to the subjects discussed in this article, please contact Zara or another member of the team in Derby, Leicester, or Nottingham on 0800 024 1976 or via our online enquiry form.

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