Settlement Agreement FAQs
Have you been offered a settlement by your employer?
- Read through our below guide to frequently asked questions.
- Please do not hesitate to get in touch if you have received a settlement agreement.
What is a settlement agreement?
A settlement agreement is a legally binding contract made between an employee and employer. If you are entering into a settlement agreement you will be required to take independent legal advice for it to be totally binding in law.
The intention of a settlement agreement is to waive (agree not to bring) all and any claims the employee or worker may have against the employer which is permissible by law (for example, unfair dismissal, discrimination, or breach of contract). In return the employee will receive a one-off payment which may include a payment in lieu of notice and/or a redundancy payment.
What are the benefits of a settlement agreement?
Settlement agreement offer the following benefits:
- A clean break between an employee and their employer.
- An employee will receive financial settlement and, in many circumstances, an agreed reference; and
- An employer will not have to deal with a future claim the employee might have brought.
Why might a settlement agreement be offered?
A settlement agreement is offered when your employment is coming to an end. The most common scenarios of this is when an employee is subjected to a performance, disciplinary or redundancy process, an employer will decide to offer a settlement agreement to avoid the long drawn out processes that can occur as a result.
In addition to this, where an employee has a dispute with their employer and they negotiate an agreement to exit the business, the final terms will be set out in a settlement agreement.
It is important to note, that just because you have been offered a settlement agreement, does not mean you are obliged to accept it.
Are my payment terms acceptable?
This is likely to be the most important part of the settlement agreement for an employee. Your agreement should set out exactly what you will be receiving
- Ex-gratia payment:
- This is a sum of money your employer agrees to pay you over and above what you are entitled to under your contract of employment (i.e. compensation).
- It may be possible to negotiate this figure, and is something we can discuss with you.
- The first £30,000 you are paid is tax free. Anything over and above £30,000 is taxable, therefore, it may be worth taking some tax advice.
- Pay in lieu of notice (PILON):
- The agreement will set out what notice you are entitled to, including whether or not you will be required to work your notice period.
- If you are not required to work your notice, you will receive a PILON, usually in one lump sum. It will also mean that your termination date will be sooner than if you worked your notice.
- PILON payments are subject to tax and NIC.
- Final payment to termination date:
- The agreement must provide that you will be paid your salary, accrued holiday, benefits and outstanding expenses up to the termination date. Any benefits you receive will end at the termination date, unless otherwise agreed.
- Payments are subject to tax and NIC.
You should speak with one of our legal experts who can analyse your claim and advise you as to whether or not the proposed payments are acceptable.
Will I be paid my bonus and/or commission?
This will depend on the terms of your contract of employment as they will determine whether or not you entitled to outstanding commission or bonus payments. If you are entitled to such payments, they should be set out in the agreement.
What are restrictive covenants?
Restrictive covenants are sometimes set out in a settlement agreement to prevent you from acting in a particular way, for example, prevent you from working with a competitor or taking clients with you when you leave.
You should check the terms of your contract of employment first, and see if the restrictive covenants in the agreement are merely being re-affirmed. If the restrictive covenants are new or have been amended, there are two questions you should ask:
- Are they too onerous?
- Should I be agreeing them?
How much will I have to pay for legal advice?
For a settlement agreement to be valid, you must receive independent legal advice on the terms of the agreement.
As it is a requirement for an employee to receive independent legal advice, it is common practice that an employee will agree to pay a contribution for you to receive legal advice (Note: a contribution towards legal fees is not an entitlement or right under statute). This will usually be between £250 and £500 plus VAT.
Can I take legal action instead?
You can opt to take legal action instead of signing the settlement agreement, however, you should be aware that taking legal action is not just potentially costly but can be time consuming and stressful.
In addition to this, upon signing a settlement agreement you will waive your rights to bringing a claim against your employer, the agreement will usually specify which claims are being waived.
If you try to bring a waivered claim to the Employment Tribunal, you will be breaching the terms of the agreement and be required to pay some, or all the payments made by your employer. In some circumstances there may be an indemnity in place which requires you to indemnify the employer for future costs.
You should therefore seek advice from a solicitor before making such a decision.
Lucy Richards, 01/02/2022
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