At its simplest, a Settlement Agreement (previously known as a Compromise Agreement) is a contract where, in return for money, the employee agrees not to bring employment tribunal proceedings against you.
A Settlement Agreements can also be used to give greater overall business protection. The inclusion of more extensive provisions such as restrictive covenants, protection of confidential information, protection from the employee making derogatory comments about the company, agreed announcements to clients and employees, continued assistance can all leave the company in a much stronger position following an employee exit.
Statutory requirements for a Settlement Agreement
Section 203(3) of the Employment Rights Act 1996 states that for a Settlement Agreement to be valid, certain conditions must be met. The conditions are:
- the agreement must be in writing;
- the agreement must relate to a “particular complaint” or “particular proceedings” – each agreement should be tailored to the particular circumstances, so the particular or potential claims should be specifically identified in the agreement;
- the employee must have received legal advice from a Relevant Independent Adviser (“RIA”) on the terms and its effect on the employee’s ability to pursue any rights before an employment tribunal – this includes qualified lawyers, certified trade union representatives and specific worker/employees at advice centres;
- the RIA must have a current contract of insurance, or professional indemnity insurance, covering the risk of a claim against them by the employee in respect of the advice;
- the agreement must identify the RIA;
- the agreement must state that the conditions regulating settlement agreements have been satisfied – many statutory claims may be settled by a Settlement Agreement, but to enable the parties to contract out of them, the agreement must contain a clause which states that it has satisfied the (contracting-out) requirements of the relevant act.
A compensation payment should not be something which the employee is already contractually entitled to. The amount of the compensation payment is a matter for negotiation between the employer and employee. The Relevant Independent Adviser will not advise whether the payment being made is a ‘good deal’ for the employee, but will assess what (if any) claims the employee may be giving up by entering into the agreement and the possible compensation that they may otherwise be entitled to if they pursued a claim rather than entering into the Settlement Agreement.
An employee is only entitled to notice or a payment in lieu of notice if the employer is terminating their employment. Therefore in cases where the termination is by mutual consent, notice or a payment in lieu is unlikely to be due.
Employees should be paid as usual up until the termination date, as well as receiving a payment in lieu of any accrued but untaken holiday on a pro-rated basis.
Compensation payments under £30,000 are tax free, but tax is only payable on the amount which exceeds £30,000 in relation to payments above this amount. A Settlement Agreement may include an indemnity from the employee for any tax liability which might arise, regardless of the amount.
Pay up to the termination date, payments in lieu of accrued but untaken holiday and payments in lieu of notice are generally paid net of tax and national insurance.
It is usual for a Settlement Agreement to include a requirement for the employee to keep the existence and terms of the agreement confidential. If there is a mutual confidentiality obligation upon the employer, no additional ‘consideration’ will be required.
If the obligation regarding confidentiality of the existence and terms of the agreement only apply to the employee and/or any other confidentiality provisions go beyond those contained within the contract of employment, then fresh ‘consideration’ is necessary (usually a further taxable payment).
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