Settlement Agreements: Answers to the most common Questions Employers Ask

A Settlement Agreement (formerly known as a Compromise Agreement) is a legally binding agreement between you and your employer. This usually provides for a severance payment by the employer in return for your agreement not to pursue any claims in a Tribunal or a Court. At Davenport Solicitors, we are experts in helping both employers and employees alike who may find themselves in a settlement agreement situation.  In this post, we provide answers to the most common questions employers ask with regards to settlement agreements.

When should I ask an employee to enter into a Settlement Agreement?

As an employer, you can offer a settlement agreement for many reasons. Although, usually, it is because something has gone wrong at work. An employee may disagree with the way someone at work treats them. Or they may have been harassed and discriminated against. Additionally, they may have been dismissed or managed out of their job.

A Settlement Agreement would also be used where there is a dispute between an employer and employee – as a means of bringing that dispute to a close. In other words, it becomes the document that sets out the final terms that have been negotiated against the threat of legal claim against an employer.

How Are Settlement Agreements Calculated?

The amount of compensation an employer awards in a settlement agreement can depend on a variety of factors including any contractual or statutory entitlements.  Various considerations need to be taken into account when calculating an agreement.

Some elements that an employee or employer might want to consider before approaching a financial settlement include:

1. The reason a settlement is being offered
2. How long will the case be protracted if a settlement is not made?
3. The employee’s salary or loss of any benefits or holiday pay
4. The length of service
5. How difficult may it be for the employee to find new gainful employment?

Confidentiality Clauses In Settlement Agreements – what are they and why are they needed?

Typically, settlement agreement confidentiality clauses incorporate the following standard terms:

1. That the employee must not disclose any legitimate trade secrets or any information they have come into possession of as a result of working for the employer, to any third parties
2. That the employee must not disclose either the existence of or the terms and conditions of the settlement agreement to any outside third parties, except for their legal adviser, their immediate family, and those organisations where there is an obligation to do so (e.g. HMRC). Where the employee does disclose details to a member of their family, then that member of the family is also bound by the duty of confidentiality not to disclose those details to any third parties. The purpose of all this is to keep the terms of the settlement agreement private, including the compensation amount and the reasons as to why the parties have entered into the settlement agreement.
3. That the employee must not make derogatory remarks about the employer, its servants, or agents. There is also normally a reciprocal clause under which the employer undertakes to use its best endeavours to ensure that its servants or agents do not make any derogatory remarks about the employee

Are there any requirements to be met when entering into a settlement agreement?

In order to be valid and enforceable, a settlement agreement must comply with a number of legal requirements. They are:

1. The employee must receive independent legal advice on the terms and effect of the settlement agreement.This requirement recognises that the employee must be absolutely certain before agreeing to waive their rights. The advice can be given by:- a qualified lawyer (or certified legal executive);
   – a certified  and authorised officer, official, employee or member of a trade union; or
   – a certified and authorised worker at an advice centre who is not paid for providing advice to the employee.
2. The legal adviser must be clearly identified in the agreement;
3. The agreement must be in writing;
4. The agreement must specify the claims to be waived; and
5. The agreement must state that the above requirements have been satisfied.

Who should produce the settlement agreement?

The initial draft of the settlement agreement is usually provided by the employer (often drafted by the employer’s solicitor or another legal adviser.). The employee then takes independent advice on the terms, and there is often then a period of negotiation around these until an agreement is reached.

What happens if the employee doesn’t accept the settlement agreement?

If the employee doesn’t accept a settlement offer, as an employer, you have two options – either to increase the offer until they do, or withdraw from discussions, and either continue employment as before or commence whichever termination process is most appropriate.

Are settlement agreements tax-free?

Generally speaking, the employer can pay the first £30,000 compensation for the Settlement Agreement tax-free, but this will not apply to all payments. Taxation on Settlement Agreements differ according to a range of considerations.

How Settlement Agreement payments are taxed will depend on what kind of payment they are. For example, if the Settlement Agreement includes compensation that exceeds the £30,000 exemption, tax must be deducted at the OT tax code rate which may mean making deductions at different rates from 20% to 45% depending on the size of the excess. The OT Code does not include any personal allowances and divides the different tax bands into twelfths.

Can a settlement agreement be withdrawn?

Technically, yes it can be. An employer can decide that they do not want to proceed with a settlement agreement even after they have offered it, as long as it has not been signed by the parties. However, in our experience, so long as the parties are negotiating in good faith and seeking to agree on the terms, then this is unlikely to happen.

If you would like Davenport Solicitors to support you with further advice on Settlement Agreements or to speak to our settlement agreement solicitors in London, we welcome you to visit our contact us page, or contact us directly by emailing contact@davenportsolicitors.com or giving our experts a call on 02079 036888.

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