True or False: Myths about Settlement Agreements
We are currently in the midst of our series of workshops for employers on Settlement Agreements and thought it would be helpful if we put together an article about some of the myths that seem to persist about them.
Some of these are based on points raised at the workshops so far – others are from our experience of dealing with hundreds of Settlement Agreements every year (for both employers and employees, although not at the same time of course!). We hope you find them helpful!
– “If I use a Settlement Agreement it will make the payment tax-free”
FALSE
We quite often hear this one, and wanted to put the record straight. The Settlement Agreement doesn’t change the tax status of any of the payments the employer is making to the employee. If a payment can genuinely be made without deduction of tax then it can be paid tax free regardless of whether a Settlement Agreement is in place or not. Likewise, if a payment is properly taxable then a Settlement Agreement cannot change that fact.
The Settlement Agreement can however change who is liable for any tax, and it is quite common for it to contain a tax indemnity whereby one party (usually the employee) agrees to be responsible for any tax (and interest, penalties etc). It would be perfectly possible for a tax indemnity to be given without a Settlement Agreement being in place, but the majority of employers like to get the terms tied up in a Settlement Agreement along with a full and final settlement.
– “Once we’ve made an offer we can withdraw it at any time until it is accepted.”
TRUE
As with any contract you might offer, there is no binding agreement until the Settlement Agreement has been signed by both parties. We have dealt with situations where, for various reasons, an employer changes its mind about the offer it has made. One example was where an employee had been offered a generous redundancy package, but shortly afterwards the employer discovered evidence of misconduct that made it reconsider how generous it wanted to be. Withdrawal of an offer is of course something that needs to be handled carefully, so it is a good idea to take advice if this situation happens to you. This is one of the reasons why we recommend that the employer is the last party to sign a Settlement Agreement, so that you are in control of completion.
It is of course equally true that an employee is not bound by a Settlement Agreement until it is signed by both parties, even if they have previously indicated they are intending to accept. It is always worth thinking about what your approach will be if the employee decides not to sign.
– “If I say we’re having a ‘protected conversation’ the employee won’t be able to use it in a claim against me”
FALSE (mostly)
As you may be aware, the law changed in 2013 to allow employers to have certain discussions with employees which would not be admissible in an unfair dismissal claim. Although the term is fairly popular among employers, ‘protected conversation’ doesn’t have any legal meaning, so it doesn’t give any protection in itself. It is also not terminology an employee would necessarily understand. However, you might still benefit from the statutory protection if you went further and explained what you meant by a protected conversation (i.e that you wished to enter into negotiations regarding the potential termination of their employment). It would be helpful to also say that the conversation is ‘without prejudice and subject to contract’ and also to give the employee a copy of the offer in writing (sometimes with a draft of the Agreement) so that they can take it away and consider it.
The other point that it is important to make here is that the statutory protection only applies to basic unfair dismissal claims and would not prevent the employee from referring to the conversation if they were to bring other types of claim such as discrimination, breach of contract, or other types of unfair dismissal including whistleblowing. It also doesn’t apply if an employer behaves ‘improperly’ in making the offer.
– “Up to £30,000 can be paid tax free”
TRUE (Sometimes!)
It is true that there is the potential under current tax rules for up to £30,000 to be payable without deduction on termination of employment. However, this will only apply if the payment is not seen to be a taxable payment. If it amounts to notice pay and the employer has a payment in lieu of notice clause, then the money will be taxable even if it is below £30,000. Likewise, if it is a payment on retirement, or consideration for restrictive covenants, it may well be taxable. This is a complex area so it is always worth taking advice – all too often we come across situations where an employee has been given the expectation that a settlement payment will be tax-free when that is not the case, and it can make it difficult when that expectation has to be lowered.
– “Employers have to pay the employee’s legal costs”
FALSE (Strictly speaking!)
It is a statutory requirement of a valid Settlement Agreement for the employee to take independent legal advice. This has often led employers to believe that there is a requirement to pay for legal costs, but there is no such obligation in law. However, in practice it would be incredibly rare for an employer not to contribute to the employee’s legal costs.
There were two points we made about this at our recent workshops about legal costs. They both relate to setting the employee’s expectations. The first is not to say that you are prepared to pay the employee’s legal costs. Instead, you say that you are prepared to contribute to their legal costs -an important distinction. (It is also a good idea to make the contribution limit clear as well, and usually this will be approximately £300-£400 plus VAT). The second is that you should make clear that the contribution to legal costs will only be paid if they sign the Settlement Agreement.
If you would like to talk through a situation you are dealing with, or if you need advice on any aspect of employment law, please contact any member of the Pure Employment Law team (01243 836840 or [email protected]eemploymentlaw.co.uk)