FAQs: Settlement Agreements
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Since Settlement Agreements were introduced in July this year, we have been receiving a lot of enquiries from employers about them. How do they differ from Compromise Agreement (if at all)? How does the without prejudice rule work with new Settlement Agreements Code of Practice? What is the best way of using them?
We thought it would be helpful to put together some FAQs to give guidance from an employer’s perspective.
Q. Is a Settlement Agreement different from a Compromise Agreement?
A. Not really! The main thing that changed in July was the name and a few drafting issues arising from that. Essentially the principle is the same, which is that by signing the Agreement the employee is agreeing to settle potential employment claims against the employer. The main difference is the legal protection given to employers who offer Settlement Agreements in the right way, which we discuss below.
Q. What are the key requirements for a valid Settlement Agreement?
The bare minimum legal requirements are:
- the Agreement must in writing
- It must relate to particular complaints or claims
- The employee must have received independent legal advice on the terms and effect of the Agreement
- The independent adviser must have appropriate insurance covering the risk of the claim
- The adviser must be identified in the Agreement
- The Agreement must state that the statutory conditions regulating Settlement Agreements have been satisfied
There are of course lots of other provisions that we would recommend are included in a Settlement Agreement, such as confidentiality, a tax indemnity etc. but those are for the benefit of one or both of the parties rather than being a legal requirement.
What are the pros and cons of Settlement Agreements?
One of the main benefits of a Settlement Agreement from an employer’s point of view is of course that it ensures that the employee will not pursue employment claims. It can be a good way of achieving a ‘clean break’ and giving clarity on the terms of the employee’s departure.
However, obviously a Settlement Agreement usually involves a cost to the employer, and depending on the situation some negotiation may be required. The employee does of course need to see a solicitor for independent legal advice on the terms, and this can sometimes involve issues being raised that you may not have expected – there is of course no guarantee that the employee will reach agreement with you, so you need to be prepared for what will happen if they don’t. It is also usual for the employer to contribute to the employee’s legal costs (provided they sign the agreement) at around £300 plus VAT.
If you aren’t sure whether a Settlement Agreement is right for the situation you are dealing with, we can advise – just give us a call.
What are the sort of circumstances where we could use Settlement Agreements?
There are a wide variety of situations which can ultimately lead to a Settlement Agreement being entered into. For example, we often see them in redundancy situations where the employer only pays enhanced redundancy payments if the employees enter into Settlement Agreements. In those cases the Settlement Agreements do not necessarily involve negotiation as if the employee chooses not to sign, they would only get statutory redundancy.
At the other end of the spectrum there can be situations where the employment relationship has broken down (for any number of reasons) and the employer feels that it would be better to make the employee an offer rather than spending significant time and resources on a situation which may not improve. A Settlement Agreement can be a good way of ending the relationship as amicably as possible.
We have dealt with Settlement Agreements in hundreds of different situations, including:
- Performance issues
- Ill-health issues
- At employee’s request due to personal problems
- Employees who are struggling to cope with technology changes despite support
- Personality clashes
What process should we follow?
While there is a process recommended under the Code of Practice it is also important to remember that often a large part of agreeing a Settlement Agreement comes down to communication and how it is presented to the employee – particularly in situations where it could be contentious. Therefore it is worth giving some thought to this before broaching the subject.
It is usually best to mention the possibility of a Settlement Agreement at a face to face meeting if possible, but we would usually recommend confirming the offer in writing, so that the proposed terms are set out clearly.
The employee should be given a reasonable period of time to consider the offer – the ACAS Code of Practice states that this should be a minimum of 10 calendar days. We recommend making clear what the deadline is and who they should contact if they or their solicitor have any queries about the proposed Agreement. You should also make clear what happens in the meantime, such as whether they are expected to attend work and whether they will be paid.
There is no legal right to be accompanied to any meetings to discuss a Settlement Agreement and many employers may be concerned about confidentiality, but there may be situations where offering a companion may be helpful to give the employee reassurance.
You do not necessarily have to provide the draft Agreement straight away, but we find it is often helpful to do this so that the employee is clear from the outset what would be involved and has something to take away to show to their solicitor.
If you behave ‘improperly’ when offering an employee a Settlement Agreement then the employee will be able to use the offer as evidence in a Tribunal or court claim (see below). This could include not giving the employee 10 days to consider it, or putting an employee under undue pressure to sign.
Do we need to say ‘Without Prejudice’?
The without prejudice rule protects settlement discussions and means that they cannot be used in a court or tribunal as evidence. However, the protection will not necessarily apply if there is no dispute between the parties, or if there is ‘impropriety’ (such as unlawful discrimination).
If you follow the ACAS Code of Practice and do not behave ‘improperly’ then the employee will not be able to use the fact that you have offered a Settlement Agreement as evidence in an unfair dismissal claim.
However, if they have any other kind of claim (such as breach of contract, discrimination or whistleblowing) then the offer may be admissible. You can try and minimise this risk by stating that discussions are ‘without prejudice’ but as stated above, you should be aware that this is not necessarily watertight.
It is also worth making clear in discussions and in writing that any offer is ‘subject to the terms of a Settlement Agreement’ – i.e. none of the offer will be binding unless and until the Agreement is signed.
How much should we tell the employee about our reasons?
Deciding this is part of thinking about how best to communicate the offer to the employee, and there is no ‘one size fits all’ solution here. Without being given any reason at all, employees may understandably feel confused or may jump to the wrong conclusion about your motivation. On the other hand, sometimes going into details about someone’s perceived failings may not help in trying to reach agreement with them. There is of course a balance between the two – usually it is best to explain the reason in general terms and try to avoid getting into too much detail.
How do I decide what to offer?
This really depends on the circumstances. In a situation where you are trying to remove an employee who may have potential claims, you would need to look at what those potential claims may be worth. Bear in mind that the Agreement will be looked at by an independent legal adviser, so if your offer is significantly less than they advise their client to accept, it may be rejected.
It can be worth including a reference as part of the deal, where this is appropriate, as this is often something that is of value to the employee without cost to you. Employers must ensure that references are fair, factual and not misleading so many references are limited to start date, end date and job title. If you are considering going into more detail it may be a good idea to take advice – we can help with this.
We have been told that we can use a Settlement Agreement to make a payment tax free. How do we do this?
Unfortunately what you have been told is incorrect. A Settlement Agreement does not change the tax status of a payment. If, for example, the payment is taxable notice pay, then the Settlement Agreement cannot change that.
There is an exemption for up to £30,000 to be paid without deduction if it is a redundancy payment or compensation for loss of employment. This applies regardless of whether there is a Settlement Agreement in place. It can sometimes be complicated to ascertain whether a payment satisfies the exemption – we can advise on this.
Most Settlement Agreements contain a tax indemnity so that if any tax is due on a payment it will be the employee’s responsibility. However, this does not mean that an employer doesn’t have to consider tax at all. Even with the indemnity there could still be consequences for an employer if HM Revenue & Customs find that you made a payment without tax knowing that you should have made it subject to deductions.
What happens if the employee doesn’t agree to sign?
A Settlement Agreement is of course completely voluntary so an employee cannot be compelled to sign. When initially offering the Agreement it is important to think about and prepare for what would happen next if agreement isn’t reached. This will of course depend on the individual situation – for example, if it is an alternative to a performance process, then if the Agreement isn’t entered into then you would continue performance management.
What terms should go in a Settlement Agreement?
While most people work from a standard Settlement Agreement (and one is available from ACAS) it is always important to ensure it is tailored to suit the individual situation to ensure it is giving you the protection you need and are paying for. There may be a need for clauses dealing with things like pensions, returning company property, confidentiality, references, or post-termination restrictions. We can of course help with supplying a standard agreement and/or tailoring it as appropriate.
Do you need advice on Settlement Agreements? We can help, just contact any member of the Pure Employment Law team (01243 836840 or [email protected]).