Settlement Agreements slideshow

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Settlement Agreements at a GlanceA Guide for Employers

Kervin & Barnes Solicitors | 020 3178 5360

Settlement Agreements at a Glance


Settlement Agreements: What are they?Settlement agreements are one of four potential ways of settling statutory and contractual claims.

The four methods are:Settlement Agreement s.203 ERA 1996;ACAS s.18 Employment Tribunals Act 1996;Agreement being reached during proceedings and a judgment being made; andACAS arbitration scheme alternative to employment tribunal hearings (only unfair dismissal and flexible working).

Prior to 29 July 2013 Settlement Agreements were called Compromise agreements.


Settlement Agreements:When do you need them?

They are necessary to settle statutory and certain contractual claims;

If an employee has not completed the 2 year qualifying period, a settlement agreement may still be necessary as there is no service threshold for discrimination claims or automatically unfair dismissal claims;

May be necessary where there are particular risks of claims; and

Employer may want additional protection and certainty of costs.


Must be in writing;Specify claims being settled;Employee must get advice from and independent adviser (employer does not have to pay for this but in practice often will);The agreement must name the adviser;The adviser must have professional indemnity insurance; andThe agreement must state that it complies with the current statutory requirements.

Settlement Agreements:What are the requirements?


Without Prejudice, Confidential and Subject to ContractTimingSpecific ClaimsClaims which cannot be settledTaxTax IndemnityWarrantiesRepayment ClauseRestrictive CovenantsEntire Agreement Clause

Settlement Agreements:Top 10 Tips


Without Prejudice, Confidential and Subject to Contract

Without prejudice only effective where there is a genuine dispute capable of being litigated;Confidential conversations only apply to unfair dismissal claims;Subject to contract prevents parties inadvertently agreeing draft terms.

Settlement Agreements:Top 10 Tips 1 of 10



Pre dismissalAssists Negotiating PositionProvides Certainty re departureWhen to suggest a Settlement AgreementPost dismissalTiming



Pre dismissalWeaker negotiating positionReason for dismissal already determinedWhen to suggest a Settlement AgreementPost dismissalTimingTermination payment more likely to be tax free


Settlement Agreements:Top 10 Tips 3 of 10Specific Claims

Can settle claims made and raised;

Should not include a blanket waiver;

Case law suggests it is good practice to refer to the nature of allegations as well as their statutory basis e.g. unfair dismissal;

Including a warranty clause that claims listed are the only claims and a repayment clause adds protection as warranty can be relied on if employee later brings a claim;

Future claims can be waived only if language is clear and plain.


Settlement Agreements:Top 10 Tips 4 of 10Claims Which Cannot Be Settled

Collective redundancies (failure to inform and consult);TUPE (failure to inform and consult) ACAS can conciliate;Pension claims;Personal Injury claims future claims they are not aware of cannot be waived. Employers can include it as a deterrent but not enforceable;Enforcement of Settlement Agreement;Agency Workers Regulations ACAS can conciliate;Right to SMP, SSP and SAP.



Tax

All remuneration is taxableExclusions:Ex gratia payment on termination up to 30,000 genuine compensation for loss of employment;Legal fees not VAT;Outplacement costs more than 2 years service;Pension scheme payments;Termination due to death, injury or disability.Contractual PILONs are taxable.


Settlement Agreements:Top 10 Tips 6 of 10Tax Indemnity

Tax Indemnity clause as HMRC decides what is taxable and what is not protects the employer if HMRC decides a payment is taxable;Full indemnity Income Tax, National Insurance contributions, penalties, fines;Standard As above, but not if caused by employers default or delay, and only relating to the termination payment;Basic indemnity Just income tax and National Insurance contributions relating to the termination payment.



Warranties

Claims listed are the only claims;The employee has not committed a fundamental breach of contract;The employee has no current offer of employment or expectation of the same;Return of all property/confidential information (and deletion of same from personal devices);No derogatory statements mutual (reasonable efforts for employer and link to named individuals or categories of people); Confidentiality of terms mutual (reasonable efforts for employer); Social networking and social media - agree to restrict employees comments about employer & agree who owns contacts.



Repayment clause

If employee breaches:Any term of Settlement Agreement;Any fundamental term or warranty of the Settlement Agreement;Instigates proceedings.The repayment should only be linked to non-contractual benefits under the Settlement Agreement, such as the ex gratia payment;Can include costs of legal proceedings to defend a claim;Recoverable as a debt;Repayment clause must be genuine pre-estimate of damages. Penalty clauses are unenforceable.


Restrictive Covenants

Restrictive covenants are useful in a Settlement Agreement where:

Restrictive covenants in the contract are insufficient; There has been a fundamental breach of contract by the employer as the restrictive covenants would otherwise fall away;Reassert/strengthen/add new covenants.

Provide separate consideration (e.g. 100) so that the whole compensation payment is not deemed taxable.




Entire Agreement

Useful if the Settlement Agreement contains all the provisions governing the employees departure;Dangerous if relying on restrictive covenants/confidentiality clauses that are found somewhere other than in the Settlement Agreement.


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Settlement Agreements slideshow

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