Even at the best of times, leaving a job can be incredibly stressful, especially where the decision to leave has been influenced by a decline in the working relationship, an intimidating or hostile work environment or where the decision was not one of an employee’s own making, such as redundancy. Add into the mix an employer feverishly chasing a signature on a settlement agreement and there is little wonder why the process becomes, understandably, overwhelming for an employee.
To help with what can seem a daunting process, we have put together a list of frequently asked questions we receive from clients seeking advice in connection with a settlement agreement and the advice we often provide in respect of the same.
What is a settlement agreement?
In essence, a settlement agreement is a contract between and employee and their employer which is either provided prior to or following the termination of an employee’s employment. The agreement regulates the terms of the employee’s departure and sets out both parties’ obligations moving forward.
Ordinarily, the agreement will ensure that the employee is paid a severance payment to compensate them for the loss of their employment in return for that employee agreeing not to pursue any claims against their employer and agreeing to other requirements such as confidentiality.
The amount of any severance payment is something that will need to be agreed between an employee and their employer and there may be a period of negotiation between the parties and their legal advisors on this point before a final agreement is reached. The severance payment is, however, often based on a number of factors including the individual’s salary, the circumstances of their departure, the finances of the company and the viability and strength of any claims the employee may have against their employer.
What payments will I receive from my employer?
As well the severance payment outlined above, settlement agreements will also more often than not deal with an employee’s notice period and may provide that rather than the employee having to work their notice, they will be paid in lieu of that instead.
This would mean an employee would be paid an amount equivalent to the salary they would have earned had they worked their notice. Additionally, an employee will also be paid an amount equivalent to any accrued but untaken holiday, pro rata, to the date their employment comes to an end.
Some employees, especially those working in sales or recruitment for example, may also be due commission which is often also dealt with under the settlement agreement.
Other contractual payments which may be prevalent for employees working in banking or finance, or employees with shares, should also be dealt with in the settlement agreement.
Will I have to pay tax on these payments?
If an employee is paid in lieu of their notice period, that amount will be subject to tax (just as it would have been were the employee required to work their notice) as are any payments in respect of untaken holiday. The same is also true of any other payments made in accordance with the terms of the employee’s contract including any bonuses or commission due to an employee. This means that whilst the gross amount may be expressed in the settlement agreement itself, it will be the net figures that are paid into employee’s account following the signing of the agreement.
The first £30,000 of any severance payment will, however, be paid tax free with any amount over that £30,000 taxed as income. So, for example, if an employee was paid a £35,000 severance payment, normally only £5,000 of that would be subject to tax with the remaining £30,000 paid without deductions.
Will I have to pay to be advised on the terms of the agreement?
Settlement agreements are unique in that they are one of only two ways in which an employee’s statutory employment rights can be waived. This does mean that employers, often very keen to ensure the settlement agreement complies with all the necessary requirements to be considered binding and that an employee has received independent legal advice on the same, will make a contribution towards the employee’s legal fees.
Often, in relatively straightforward cases where the employee is happy to sign the settlement agreement without wholesale changes, the employer’s contribution should cover the costs of obtaining the necessary advice.
Depending on the nature of the settlement agreement, however, any amendments the employee may wish to make and/or any negotiations the employee instructs their legal advisers to undertake on their behalf could see their legal fees exceed the contribution. At this point, the employee could try and negotiate an increase to the proposed contribution. An employer is not under any legal duty to agree an increase, however, and whether they do so will likely depend on a number of factors including the commerciality of the agreement itself.
Can I still bring a claim once I have signed the settlement agreement?
For the most part, no.
The purposes of the settlement agreement, from an employer’s perspective, is to protect them against any potential claims the employee may have against it. In exchange for that, the employer will pay the employee the severance payment and comply with other agreed terms.
Generally, if an employee were to bring a claim once the agreement has been signed, they risk having to return the severance payment to the employer and may also be liable for the employer’s costs in connection with recovering the same.
Do I have to sign the settlement agreement?
An employee is not under any obligation to sign a settlement agreement and should not if they are not comfortable with signing away their rights to bring an employment claim although not signing would mean the employee would not receive any severance payment or the benefit of any other proposed terms.
Employees should consider the alternatives to signing and whether that proposes a more beneficial way forward for them or not.
Our specialist employment team have great expertise and experience in advising on settlement agreements for both employers and employees. Please do not hesitate to contact us on firstname.lastname@example.org if we can be of any assistance.