EM Law | Commercial Lawyers in Central London
Employer settlement agreements solicitors
A settlement agreement is a legally binding contract made between an employer and an employee used to resolve an issue in the workplace. Most commonly used in the case of redundancy or when an employee’s employment is being terminated, settlement agreements provide an alternative to going to the employment tribunal.
Negotiating settlement agreements for employers
Our settlement agreement lawyers have extensive experience in negotiating a variety of settlement agreements. When negotiating a settlement agreement for employers, it is usual to specify that all communications should be treated as “without prejudice” and “subject to contract”. This is to ensure that:
- The parties can speak freely in negotiations without fear of anything said being used in evidence against them should the negotiations break down.
- Neither party is legally bound by anything “agreed” in the negotiations until a final written agreement is actually signed.
Common scenarios in settlement agreements for employers
Typically, the process of negotiation can take place in one of four scenarios.
Where employment has ended
The employee may be presented with a draft employer settlement agreement (marked “without prejudice and subject to contract”) and asked to revert to the employer within a fairly short timescale with a response to the settlement offer. Although it is a draconian step, employers sometimes dismiss employees with immediate effect (or with a payment in lieu of notice), at the same time as handing them a draft settlement agreement with a deadline within which to respond.
Where employment and active duties continue
The employee is approached by a manager or human resources department (either in a without prejudice discussion or a pre-termination negotiation). The employee is made an offer and potentially given a draft employer settlement agreement (marked “without prejudice and subject to contract”). They are told to take it away and consider its contents, usually within a fairly short timescale. The employee will remain in the workplace, actively carrying out their duties, but will be asked to keep the settlement discussions confidential, including the existence of the settlement agreement.
Where employment continues but the employee is not actively carrying out duties
A variant of the above is where the employee is still employed but is not actively carrying out their duties. They may be on long-term sick leave or family related leave. As above, the employee will be given a draft employer settlement agreement (marked “without prejudice and subject to contract”) and asked to respond within a certain timescale.
Where employment continues but employee is sent home
The employee may be given the draft employer settlement agreement, or an outline of settlement terms, and asked to remain at home while they consider the offer over a certain timescale. They may be placed on garden leave, or else just told it is better for them to remain at home while they consider their position. They will be asked not to have contact with colleagues or clients and their computer access may be disabled.
Possible steps in a settlement discussion (employee still employed)
Step 1: Invitation to meeting
The employer will invite the employee to a meeting at a mutually convenient time and place.
Step 2: At the meeting
At the meeting, the employer will explain its concerns (for example, performance issues or the breakdown of the working relationship) in a neutral manner, and propose an exit with an agreed settlement package. The employer should provide enough information for the employee to understand what has led to the offer and the potential consequences if they do not depart. Where inadequate information is provided, this could support an argument that there is a discriminatory basis for the offer.
Step 3: Written offer
If the employee agrees to explore the suggestion of settlement, the employer produces a written offer. The employee must have a “reasonable period” in which to consider the formal written terms.
Step 4: Settlement agreement
If the employee is interested in proceeding with the settlement, the employer will provide the employee with a settlement agreement documenting the terms, if they have not already done so. The employee will need to take independent legal advice on the implication of entering into the agreement. If the employee is not interested in exploring settlement, the employer should cease settlement negotiations and seek to tackle the underlying problem.
When dismissing an employee it is almost always better to be honest about the reasons for the dismissal. In the case of Rawlinson v Brightside Group Ltd  it was decided that the employer’s false explanation as to why an employee was being dismissed amounted to a breach of the implied term of mutual trust and confidence. The employment appeals tribunal found that the employer had an obligation not to deliberately mislead the employee. It also worth bearing in mind that the “real” reasons for dismissal are likely to come out by the disclosure required if the employee makes a subject access request. If you want to find out more about this case you can read our blog here.
Acas guidance on conducting settlement discussions
Allowing time to consider offers
The Acas Code on Settlement Agreements states that parties should be given a reasonable period of time to consider the proposed settlement agreement and that, as a general rule, ten 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.
Allowing employees to be accompanied
Although the Acas Code on Settlement Agreements acknowledges that there is no legal right for employees to be accompanied during pre-termination negotiations, it suggests that employers should allow this.
Issues relevant to drafting settlement agreements for employers
Prior to drafting a settlement agreement, a number of issues will need to be considered, including:
- The proposed timing of the termination, including the implications if there is going to be a significant delay between signing the agreement and the proposed termination date.
- The reason for termination, including how this will be reflected in the agreement (if at all) and how any associated announcements will be handled
- The value of the settlement package on offer (having regard to the employee’s salary and contractual entitlements, together with the value of any potential claims).
- Where there is a discretion to be exercised by the employer (for example in relation to bonus or share options), how this discretion will be exercised.
Tax status of payment
Where a payment is made to an employee on the termination of employment, it is either taxable in the normal way as earnings under the Income Tax (Earnings and Pensions) Act 2003 or taxed as a termination payment under sections 401 to 416. The first £30,000 of payments that fall within section 401 is exempt from tax and any excess will be subject to income tax in the normal way, with the employer being responsible for accounting to HMRC.
It is usual for the employer to make a contribution to the employee’s legal fees, since one of the statutory conditions for settlement agreements is that the employee has received legal advice.