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A Settlement Agreement (also known as Severance Agreement or a Redundancy Agreement) is an agreement ending statutory claims (for example unfair dismissal or discrimination) arising out of your employment or its termination.
In a nutshell, you have to go off and get independent legal advice before signing away your legal rights. We will advise you on any potential claims so that the employee fully understands the legal issues, and the value of any potential claims before making an informed decision. We often negotiate a better deal for our clients. It is important that you fully understand the terms of the proposed Settlement Agreement, and what it means for you.
As specialist employment solicitors we have advised hundreds of employees and helped them to get the best possible settlement. If you instruct us, as employment lawyers we will:
The cost of advice will often be covered by the employer, meaning that you may not have to pay anything for this advice personally.
See our Redundancy Calculator Tool.
Many employers fall into some very difficult traps when offering compromise agreements and the taxable position on severance payments is not always straight-forward. We are employment lawyers and solicitors based in Central London who can guide you through this difficult process, so call us now to discuss your situation.
Why do I need to sign a Settlement Agreement?
If your employer wishes to prevent you from bringing, or continuing, any statutory claims that have arisen or might arise from your employment or its termination, it is necessary to have a formal Settlement Agreement (previously known as a ‘Compromise Agreement’). The statutory claims that are being compromised by the agreement have to be specified in it. Statutory claims will include, for example, unfair dismissal, unlawful deductions from wages, sex, race, age or other unlawful discrimination.
Employers also use Settlement Agreements to settle other claims arising from your employment such as breach of contract and claims in negligence (for example personal injury claims).
Once a Settlement Agreement is signed by both parties, it will bring to an end your right to pursue the specified statutory claims and other claims arising from your employment or its termination in an Employment Tribunal or elsewhere (including for example the County Court or High Court). Before you decide whether to sign away your rights, you may therefore wish to seek advice in order to:
The advice we give will normally cover what the terms of the agreement are and what they mean, and not detailed advice on the above matters. If you wish to have more detailed advice, please let us know and we will discuss the cost implications.
Why do I need to have a solicitor?
In order for a Settlement Agreement to be effective, you need to have had independent legal advice on its terms and effect. Generally your legal adviser will be asked to sign a certificate attached to the agreement or a letter to confirm:
I confirm that I and Reculver Solicitors comply with these requirements.
You are of course free to instruct whoever you wish to provide you with independent legal advice, provided they are qualified to do so, even if you have been referred to us by your employer. Our duty is to act in your best interests and never in those of the employer.
What matters do I have to consider?
There are a number of issues which typically come up when reviewing Settlement Agreements:
Have I got a good deal?
A sum of money is normally offered in addition to any payments your employer is obliged to pay you. This is often referred to as the Compensation, Termination, Ex Gratia or Settlement, Payment.
The payment may not be as generous as it initially appears; for example it may include your entitlement to notice and/or statutory redundancy pay. Bear in mind that there may not be any obligation on your employer to offer enhanced payments in a redundancy situation.
Although a consideration of the adequacy of the payment in your particular circumstances is outside the scope of this document, it is a good rule of thumb to calculate how many weeks’ or months’ net pay it represents. Employment Tribunals make their awards based largely on your loss of net earnings from the date of termination. This could take three to six months or longer and it is normally only if we can identify strong legal claims that we may be able to negotiate an increase in the payment.
How is the compensation payment taxed?
Under the Income Tax (Earnings and Pensions) Act 2003 (‘ITEPA’), payments made in respect of compensation for the termination of employment are normally exempt from tax up to £30,000. Any part of the payment that is over £30,000 will generally be subject to tax at the full applicable rate.
However, there are some exceptions. For example, if you are being made a payment in lieu of notice or any part of your compensation payment is referable to notice monies, it will be taxable. Also, any sums paid in exchange for your agreeing to enter into post-employment restrictions (such as non-compete provisions) will be taxable.
Even if we and your employer believe that any payment can be paid tax free, it is important for you to remember that there is always a risk that HM Revenue and Customs may take the view that tax has to be paid.
In almost every Settlement Agreement, there will be a tax indemnity clause, stating that in the event that any tax liability arises, it will be your responsibility and not the employer’s. The clause typically states that if the Revenue makes a demand against the employer for tax, then the employer can recover that sum from you, together with any interest, penalties or associated costs.
Employers rarely agree to the indemnity clause being removed but when we review the agreement we will consider ways of ensuring that the risk to you is minimised, as the agreement may be poorly worded and give rise to an unnecessary exposure to tax, and also will request that you be given reasonable warning of any liability under the clause if appropriate.
Are there any claims that I can bring even if I sign a Settlement Agreement?
Although the purpose of the Settlement Agreement is to settle all claims arising from your employment or the termination of your employment, we would normally expect to see certain claims excluded:
Will I have to pay anything for your advice?
Employers will typically contribute to the cost of your obtaining independent legal advice up to a specified sum. Once the agreement is concluded we will raise an invoice addressed to you but marked as payable by the employer, and send it to the employer for payment. You will be responsible for any costs over and above this contribution and we would also refer you to our client care letter.
What will I have to do?
Apart from giving up your legal rights, you may be required to do other things, including:
What will my employer have to do?
We would normally expect the agreement to incorporate the wording of a reference that your employer will provide to any prospective employer or agent that asks for one. It is increasingly common nowadays for employers only to give brief factual references, simply confirming job title and dates of employment, especially if you are employed by financial or legal institutions. This is because your employer could be sued by a future employer if they say anything which is inaccurate or misleading. This can be a concern to employees, but the more common this practice is, the less that is likely to be read into it by a future employer.
It may be worth asking for reciprocal obligations from your employer in respect of confidentiality and/or critical or damaging comments, particularly if you are leaving in unhappy circumstances. Please let us know if you would like us to raise this.
Why is the agreement and correspondence marked ‘Without Prejudice and Subject to Contract?’
Most Settlement Agreements are stated to be ‘without prejudice’ until they are signed by both parties. This means that they are off the record and cannot normally be referred to in legal proceedings. Once they are signed, they become ‘open’ and legally binding and can be referred to if, for instance, one party alleges that the other has breached the agreement.
See also Citizens Advice.
People often feel forced to seek employment law advice when they are least able to afford it. We try to offer a range of options to make effective legal advice and representation accessible. We will give a clear estimate of costs before undertaking work and can agree a cap on costs. We always consider initial enquiries by telephone free of charge.
Most people will experience redundancy at some point in their working life. We have helped many people through this difficult period. We have also developed a Statutory Redundancy Payment Calculator tool which tells you a) what your statutory redundancy payment would be b) your statutory entitlement to notice, and c) what you might recover if your dismissal was unfair.
You may have been unfairly dismissed for supposed misconduct, or dismissed for alleged poor performance. You may have been forced to resign. We will give you practical, realistic advice on the value and merits of your claim and take the claim all the way to a Tribunal hearing if settlement is not possible.
We can advise you on how best to present your case at disciplinary or grievance hearings.
If your employer is working you like a slave, or failing to give you paid holiday, they may be in breach of the Working Time Regulations.
Discrimination on the grounds of sex, race, disability, sexual orientation and religious belief is unlawful and can have a devastating effect on the victim. Few employers ever admit to discrimination or harassment and some will do it unwittingly. We have substantial experience in all types of discrimination claims and are skilled at presenting Tribunal claims.
If you are a mother-to-be or have given birth, we can intervene when your health and safety has been threatened, or your employment put at risk and can clarify what your legal rights are. There is now the right to paternity leave, unpaid parental leave and unpaid time off to deal with family emergencies. We can advise you on these rights and how to apply them.
If your boss has docked your pay without your written consent, or failed to pay you for accrued holiday, you may be able to claim ‘unlawful deduction of wages’. We can help stop this happening or bring a claim to recover the money docked.
We can help you to stop it happening, or if things have gone too far, we can seek a negotiated severance for you.
Parents with children under the age of six and disabled children have the legal right to request flexible working. We can help you assert this right.
Are you a whistle blower? You may become aware that something illegal, unlawful or unethical is going on in your organisation. We will advise you what to do about it and act for you if you suffer a detriment as a result of making a protected disclosure.
Don’t forget, most claims must generally be received by the Employment Tribunal no later than three months from the date of the last act complained of. You should now normally make use of internal procedures before bringing a claim in the Tribunal.
Sometimes disputes regarding discretionary bonuses can arise, especially if you are leaving your job whether by resignation or redundancy, and frequently a problem for people working in investment banks in the city of London.
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