For your business

Settlement Agreements and Negotiated Exits

Sometimes it’s just not working. There are many reasons why an employer might want to terminate employment; sometimes in circumstances an Employment Tribunal would consider fair, some not. Even when you are confident of your legal position, reaching early agreement with an employee can save time, hassle and cost.

It’s possible to have a “protected conversation” with an employee to discuss a negotiated exit. But the law surrounding protected conversations and without prejudice communications is complicated. Our advice: don’t say anything you wouldn’t want an Employment Tribunal to hear. We can help you frame the conversation in such a way as to strengthen your negotiating position whilst protecting the business in the event negotiations fail and litigation follows.

Settlement Agreements (formerly known as Compromise Agreements) prevent employees bringing Employment Tribunal claims, usually in return for a compensation payment. They can also regulate other aspects of the post-employment relationship, such as provision of references, confidentiality and restrictions on competition. They can be used in matters as simple as voluntary redundancy or more complex situations following or instead of grievance or disciplinary procedures.

It isn’t possible to settle statutory employment claims without using ACAS (via a COT3 agreement) or a Settlement Agreement on which the employee has had independent legal advice. It is important and cost effective to obtain bespoke advice on your particular situation to ensure that both the deal and Settlement Agreement terms are likely to be accepted by a well advised employee. Enforceable Settlement Agreements must refer to the particular proceedings that are being settled so reliance on a past precedent can be a false economy. We ensure that the Settlement Agreements we draft properly protect the employer whilst not containing any unfair terms that would prompt requests for amendment from the employee’s legal advisor (and because we also advise employees offered Settlement Agreements, we know what the likely issues will be). This way, the process of completing the Settlement Agreement progresses as smoothly and quickly as possible.

It is usually possible to agree a fixed fee to draft a Settlement Agreement. Where fixed fees are not possible (such as an open ended negotiation), we will provide the best estimate we can and keep you fully informed about the costs you are likely to incur.

Contact us on 020 7935 3522, lt@freemanssolicitors.net or using the contact form

FAQs about Settlement Agreements

Why should we use a Settlement Agreement?
A deal struck with your employee can’t stop them bringing statutory employment claims in an Employment Tribunal unless it has been negotiated through ACAS (using a COT3 Agreement) or is recorded in a Settlement Agreement on which the employee has received independent legal advice.

When can a Settlement Agreement be used?
Settlement Agreements are used in a variety of situations ranging from voluntary redundancy, poor performance, disciplinary allegations or grievances raised by employees about discrimination, bullying, harassment or victimisation.

How should we negotiate a Settlement Agreement?
Like any negotiation, success involves making the deal seem better than the alternative. Tactics will vary from case to case – understanding the personality involved is crucial. Successful conversations about Settlement Agreements persuade the employee that their future is brighter outside of the employer’s organisation. The stick is the likely outcome for them if the deal is refused; the carrot is the deal itself. How much to use of each will depend on the situation, the strengths of each party’s bargaining position and how receptive the employee is likely to be to striking a deal rather than embarking on litigation.

When facing a counter offer, look at the cost of keeping the employee employed through the alternative disciplinary, capability or redundancy consultation procedure. Remember not to look at salary cost alone: the management time involved may be significant, and don’t forget employer NI contributions, pension contributions and other contractual benefits. Look also at the risk to the business of keeping the employee or dismissing without a Settlement Agreement: the costs of an Employment Tribunal claim, the impact on other staff from a problem employee, perhaps even lost business. Balance this against the offer and possible risk that other employees might hear about the offer (notwithstanding confidentiality clauses), making future situations more difficult to negotiate.

We can coach you through a negotiation or negotiate with the employee or their legal representative on your behalf. Our experience in these matters enables us to gauge how to move negotiations towards a deal palatable to both parties.

Are Settlement Agreement payments taxable or tax free?
The first £30000 of any compensation for loss of employment is tax free. This doesn’t mean that all payments made under a Settlement Agreement are tax free: money due to the employee under the Contract of Employment is taxable in the usual way. This applies to any pay owed up to the termination date, any bonus or commission due under the contract, accrued but untaken holiday and, pay due in lieu of notice. The parties can’t agree to waive taxable payments (or the right to notice) and expect the severance pay to remain tax free.

It is important that HMRC understand that the payments due under the Settlement Agreement are to compensate the employee for loss of employment rather than for anything else. Additional consideration should be provided for any warranties the employee is giving (such as confidentiality), either in the form of a mutual warranty, non cash benefit or nominal taxed payment.

Any Settlement Agreement we draft for you will identify which payments are taxable and which can properly be made tax free, maximising the incentive to sign the agreement whilst ensuring that you can account to HMRC for any sums due.

How should we calculate a Settlement Agreement?
The first step in calculating what to offer is to look at the payments due under contract or statute, such as notice pay, holiday pay or a statutory redundancy payment. You then need to decide what to offer in terms of premium as incentive to sign the Settlement Agreement. This will depend on the circumstances, and potential alternatives if the employee doesn’t sign. Remember that they will receive independent legal advice as to their contractual and statutory rights and likely compensation for any claims. We can advise whether a proposed offer is pitched too high, too low or about right.

What should a Settlement Agreement contain?
There are statutory requirements for a Settlement Agreement. The key is to settle the “particular proceedings” that the employee might otherwise bring.

Settlement Agreements usually also include an indemnity about other potential claims arising out of employment as well as an understanding that the employee will bear any tax that has not been deducted at source, and indemnify the employer accordingly.

There are a number of other desirable clauses including protecting the employer’s confidential information, return of company property, restrictions on competition, confidentiality of the negotiation and terms of the Settlement Agreement (and sometimes the events leading to termination of employment) and preventing the employee making derogatory comments. Employees will often want a guarantee that an acceptable reference will be provided.

We will discuss your particular circumstances and make sure that the Settlement Agreement contains clauses that protect you whilst being unlikely to prompt objection from an employee’s advisor.

What does “without prejudice and subject to contract” mean?
Without prejudice communications are designed to resolve a dispute. Parties cannot refer to without prejudice communications in any subsequent litigation. This is so parties feel free to make offers or concessions that might otherwise indicate acceptance of liability.

Settlement Agreements are often offered before a dispute, in fact in order to avoid a dispute. The first communication might not therefore be without prejudice. Subsequent negotiations may become without prejudice if the employee acknowledges that there is a dispute or threatens potential proceedings. We can advise whether communications are truly without prejudice and how to frame those that are not.

Subject to contract means just that: the offer is made subject to the employee agreeing and signing the Settlement Agreement. The offer will not be binding until the Settlement Agreement is completed, which should be drafted to make clear that this requires the signature of both parties and a certificate from the legal advisor that they have given advice and meet the statutory requirements.