Surge in redundancies could lead to spike in claims against employers

What is a settlement agreement?

A settlement agreement is a legally binding contract between an employer and employee which is a full and final settlement of any claims that an employee may have against his/her employer. Your employer will use this form of agreement as it is one of two types of agreements that allow you to legally waive any claims you might have at an employment tribunal.

 When might a settlement agreement be used?

Settlement agreements are typically used to bring an end to your employment either where an employer is making an enhanced redundancy payment, or when the relationship between you and your employer have soured or your employer has concerns about you. Common scenarios include redundancy, where the employer has concerns about the employee’s performance, to avoid disciplinary action, where the employee has been on long term sick and/or or where the relationship between you and your employer has broken down.

Often the agreements are used to avoid the employer needing to go through a formal procedure. Instead a financial payment is agreed in return for you agreeing to waive your rights to go to an employment tribunal.

How much should I receive?

There is no set amount of payments and the amount of any settlement payment will depend upon the individual circumstances of each case, for example:

• the length of your employment;
• whether you might have a strong claim against your employer;
• does your employer pay enhanced redundancy payments;
• the cost, management time and risks to your employer, if you brought a claim to a tribunal.

The settlement agreement should contain a clear breakdown of the payments which have been agreed and should also state whether any of them are to be paid to you free of tax.

Payments of up to £30,000 compensation can often be paid without tax being deducted, if the payment is being made on an “ex gratia basis” (that is, it’s a payment your employer has decided to make over and above your contractual and statutory entitlements). Sums attributable to your notice period are always taxable.

What else will be included in the agreement?

It is often the case that a reference will be agreed as part of the settlement agreement and most agreements will contain detailed arrangements about confidentiality and not making derogatory remarks about each other.

Is there anything else I need to know?

In order for an agreement to be binding and effective from your employer’s perspective, it must be in writing and must specify the particular complaints which the agreement is now settling. Critically, you must take independent legal advice as to the terms and effect of the agreement. Normally, your employer will contribute to your legal costs but sadly some employers have an unrealistic view on how much time needs to be spent to ensure that you are properly advised!

It is also common for the employer not to put forward its best offer first time around. We have negotiated many substantial improvements in settlement terms over the years but this obviously depends on how generous the initial offer is. Typically, most negotiations are concluded within 1 to 2 weeks.

Need more information?

Daniel Wilde is Head of Employment Law at Harding Evans Solicitors. You can contact him on wilded@hevans.com or 01633 760662 or visit www.hardingevans.com.