Settlement Agreements - Advice for Employers

Settlement Agreements - Advice for Employers

Settlement Agreements are legally binding contracts whereby a current or former employee or worker agrees to waive or settle a claim (typically, all possible claims) against the employer in return for a payment, usually on termination of employment.

Employees may have claims against their employer under statute, under their contract of employment, and under other common law rights such as the law of negligence.

Employers may want to remove an employee from their organisation, by reason of underperformance or misconduct, without the need to carry out a long capability or disciplinary process.

Although common law claims (such as breach of contract or negligence) can be waived or settled by way of any legally binding written or oral contract, certain statutory employment rights and discrimination claims can only be waived or settled by way of ACAS Conciliation or a settlement agreement that meets certain statutory requirements.

There are a number of requirements for a settlement agreement to be legally valid, which include:

  • The agreement must be in writing.
  • The employee or worker must have received legal advice from a relevant independent adviser on the terms and effect of the proposed agreement and its effect on the employee's ability to pursue the statutory rights in question before an employment tribunal.
  • The independent adviser 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 adviser.

The terms of the agreement will be agreed between the employer and the employee, but importantly the agreement will contain a waiver of the specific claims the employee has agreed to waive. Non-financial terms can be included in an agreement, such as an agreed reference, confidentiality clauses and restrictive covenants.

Compensatory payments of up to £30,000 can be paid without tax being deducted. A change in legislation in 2017 however means that certain payments, such as pay in lieu of notice, must be taxed before payment. Failing to deduct tax from such a payment could leave an employer liable to HMRC. As such, it is always prudent to seek advice before discussing tax free payments with employees.

Our Employment Team are experts in advising in relation to Settlement Agreements, from drafting agreements for you to offer to your employees, to advising you as to the terms of proposed agreements and the tax position of compensatory payments.

Should you require advice with regards to Settlement Agreements, please contact a member of the team team using the links below.

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