Settlement Agreement Q&A For Employers

Settlement agreements can be complex issues to deal with and can have damaging implications for a business if not done correctly. It is essential that you secure professional legal advice to help support you through the process of creating a settlement agreement for employers.

Here are some commonly asked questions by employers when looking to arrange a settlement agreement for an employee.

For further advice, please contact our team on 0113 322 9222.

Q: What are the essential elements of a settlement agreement?

Specific clauses will of course be included in certain settlement agreements to meet the circumstances of the dispute or employment issue, but there are general elements which should be included in the agreement to make it legally binding as well as fair and reasonable for all parties:

• Termination details – Where this is relevant to the agreement, it should include the last working day, any notice period and any handover responsibilities required of the employee.

• Compensation – This should detail the compensation payment, the payment schedule and any details of benefits which will continue.
• Confidentiality – Preventing the disclosure of sensitive information. This usually includes the confidentiality provisions in respect of the negotiations leading up to the agreement, and the terms of the agreement itself. Plus, how long the confidentiality obligations will be in place for.
• Contribution towards an employee’s legal fees.
• Reputational protection – Clauses should be included for both parties to agree to non-disparagement, which is designed to protect the professional reputation of the business and the future job prospects of the individual.
• Reiteration of any post termination restrictions that are set out in the contract of employment or a provision for new restrictions.
• Future claims – Clauses should state that the employee agrees to waive their right to bring any future claims relating to the settlement agreement, and confirms the employee has received independent legal advice on the implications of this.
• References – There should be provision for a standard reference letter that an employer should send so as not to prejudice the future job prospects of the individual. This provision should also state the employer’s obligation to send the reference and to respond to requests.
• Tax indemnity – The employee is responsible for any tax liabilities relating to the settlement payment.
• Returning property – The employee is obligated to return company assets such as vehicles, phones, laptops and sensitive or confidential documentation, and by a specified date.

Q: How can I mitigate risk when creating a settlement agreement?

Although all individual employment issues and disputes are different, a major factor to consider with all settlement agreements is that they need to be fair and reasonable. A dispute such as this can lead to damaging circumstances for a business, so they should implement proactive policies to guard against this, including:

• Communications – Being open and transparent with employees to help with understanding and acceptance.

• Legal professionals – Use experienced and specialist legal professionals to ensure compliance and guard against future claims and disputes arising from the agreement.
• Employee relations – Be sensitive and professional to ensure trust and morale amongst the remaining workforce is not affected.
• Costs – Balance the costs incurred in creating a settlement agreement against the financial impact of future court cases and tribunals, to ensure settlement agreements are only made when they positively impact the business.
• Non-disclosure Agreements (NDAs) – NDAs can be useful in protecting the business in employment disputes, but overusing them can promote a suspicion that employees are being silenced, and this can start to question the use of fairness and transparency in negotiations. So be sparing with NDAs and only use them where necessary.

Q: What are the employment rights of an employee that I need to be aware of as an employer?

When an employee agrees the terms of a settlement agreement, they are generally waiving three sets of employment rights, which they must acknowledge their understanding of when signing the settlement agreement:

Contractual rights – these are those rights set out in an employee’s contract of employment, such as:

• Job title
• Holiday entitlement
• Notice period
• Right to be paid salary and other benefits
• Rights can be expressly set out or implied. For example, there is an implied term of mutual trust and confidence in every contract of employment. The breakdown of trust and confidence between an employee and an employer is one of the most commonly cited reasons in constructive dismissal cases.

Common law rights – these are those rights that derive from the general law in relation to treatment by an employer towards an employee, such as:

• Negligence
• Defamation
• These types of claims can generally only be pursued in the high court to county court.

Statutory rights – these are those additional rights that can be found in UK statute. These types of claims can normally be pursued in an employment tribunal. Typically, these types of rights are:

• The right not to be unfairly dismissed (usually only available to those employees with more than two years’ service).
• The right to a statutory redundancy payment (only available to those with more than two years’ service).
• The right not to suffer unlawful deductions from wages.
• The right to receive the minimum wage.
• Various maternity and paternity rights.
• The right not to be discriminated against contrary to the Equality Act 2010, covering direct and indirect discrimination, harassment, and victimisation based on race, sex, religion or belief, sexual orientation, and disability, among others.
• The right to be accommodated by an employer who must make reasonable adjustments if the employee is a disabled person for the purposes of the Equality Act 2010.

Please note this is not an exhaustive list.

Q: How should I calculate a compensation figure in a settlement agreement?

The process of arriving at a compensation offer in a settlement agreement should be broken down so that the individual fully understands it. The offer should include:

• Payment of salary and benefits up until the termination date;
• A notice payment – if you do not require the employee to work their notice;
• A payment of accrued holiday pay;
• A compensation payment – the level of the compensation payment can vary depending on the individual circumstances which we can discuss with you
• Any bonuses and commissions owed
• Loss of pension
• Private insurance

Some claims, such as discrimination, have no compensation limits and hence a higher compensation amount may be negotiated here. Where an agreement relates to a compulsory redundancy, the compensation would usually be equal to the statutory levels for that position. In some rare cases, where there are potentially legal risks for the employee, an employer may be able to negotiate a settlement agreement with no payment involved. Or to go one step further, may be able to negotiate payment from the employee to the employer in return for a clean break and the employer waiving their right to bring future claims against the employee, rather than the other way around.

Q: Are there any types of disputes usually excluded from settlement agreements?

Yes. It is usual for an agreement not to settle claims in respect of an employee’s accrued pension rights, as these have accrued in the past and cannot retrospectively be removed by an employer outside the rules of the pension fund. In addition, there is usually a clause dealing with any future claim for personal injury against an employer. Personal injury claims are either excluded from the agreement completely or the employee only signs away the right to pursue claims for injuries of which they are already aware.

Q: What should I expect to pay to an employee as a termination payment?

In terms of the termination payment, this may be offered on a tax-free basis. Tax issues are complicated and will vary from case to case. Generally speaking, up to £30,000 can be paid free of tax provided it is paid as compensation for loss of employment and does not contain any contractual entitlement such as notice pay, holiday pay or salary. New rules came in in 2018 which changed the way in which payments in lieu of notice can be dealt with under the terms of a settlement agreement. You may see the term Post Employment Notice Pay (PENP) in the agreement. We cannot advise you specifically on tax matters but we can certainly signpost you the best advisors if necessary.