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Settlement Agreements

In our series of articles following the collapse of Carillion we have looked at how to avoid making compulsory redundancies along with consultations and redundancies. We conclude the series taking a look at Settlement Agreements.

Settlement Agreements are normally used to bring an employment relationship to an end in a mutually agreed way. They are often used when an employer and employee agree that their employment relationship is no longer working, and can be used to conclude a workplace dispute.

If as an employer you have been unable to avoid staff losses then a settlement agreement can also be a sensible way to document agreements reached concerning the termination of employment.

Key features of Settlement Agreements:

  • They are legally binding
  • They will usually waive an employees right to bring a claim covered by the agreement, for example in a tribunal or court
  • The employee usually receives some sort of financial payment
  • They are voluntary, the terms are mutually agreed and neither party has to enter into them if they do not wish to
  • They are usually reached through a process of confidential discussion and negotiation

Entering into a settlement agreement can provide a swift end to a working relationship that is not working and can avoid the time, cost and stress of a potential tribunal claim.

Employers can open up settlement discussions with employees at any time. It is usually helpful to put any offer in writing so that any misunderstandings are avoided.

The employee needs to be given reasonable time to consider an offer of a settlement agreement. What is reasonable will depend on the circumstances of each case, including what both parties might agree is a reasonable time.

As a general rule, a minimum period of 10 calendar days should be allowed to consider the proposed formal written terms of a settlement agreement and to receive independent advice, unless the parties agree otherwise.

A settlement agreement is made between two parties, the employer and the employee, but the employee may want to involve someone else in the discussions. Whilst not a legal requirement, it is good practice to allow employees to be accompanied at the meeting by a work colleague, trade union official or trade union representative. Allowing the individual to be accompanied may help to progress settlement discussions.

Payment under a settlement agreement can often be made free from tax and national insurance up to a value of £30,000. Payments which are contractual, for example payment of notice or accrued holiday pay is subject to deductions for tax and national insurance. Redundancy pay or damages/compensation for loss of employment can be paid as damages and can be exempt from tax and national insurance.

For a settlement agreement that waives an individual’s right to bring legal proceedings to be valid, certain legal conditions must be met.

The agreement must be in writing and the employee must receive independent advice from a relevant adviser. There may be a cost involved in obtaining such advice and employers may wish to offer to pay any such fee, or a contribution towards it.

Settlement agreements can include clauses whereby each party agrees to keep the terms confidential and agrees not to make disparaging comments about each other.

Employers proposing to make 20 or more employees redundant over a period of 90 days or less should consider carefully their obligations to consult collectively with employees. Where employers run voluntary redundancy schemes, employees who leave under such schemes and sign settlement agreements may still need to be counted when determining whether the thresholds for collective redundancy rules have been met.

A settlement agreement is a useful tool available to an employer and provides some certainty that generally speaking an employee will be unable to bring a tribunal claim.

If any provision of a settlement agreement is not honoured, for instance, if an employer does not pay the employee the compensation set out in the agreement, or an employee fails to abide by an agreed confidentiality clause, then the remedy is usually to claim breach of contract and damages in the County Court.

To read our complete series of articles following the collapse of Carillion please click here

If you need help and advice in relation to settlement agreements, please do not hesitate to contact me or the employment team on 0113 350 4030 or at hello@scesolicitors.co.uk

If you would like to be kept up to date with employment law and dispute resolution updates, please subscribe to our monthly newsletter

SCE Solicitors is a boutique employment law practice based in Leeds which advises clients nationwide.  Please note that the information in this blog is to provide information of general interest in a summary manner and should not be construed as individual legal advice. Readers should consult with SCE Solicitors or other professional counsel before acting on the information contained here. o

Richard Newstead
Latest posts by Richard Newstead (see all)
Richard Newstead

Richard qualified as a Legal Executive over 20 years ago and has significant experience in Employment law and Litigation. Richard acts for both employers and employees drafting and advising on settlement agreements, contracts of employment, consultancy agreements, directors service agreements and general workplace policies. He acts for commercial clients in the employment tribunal dealing with unfair dismissals, constructive dismissals and claims for discrimination.

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