Our settlement agreement lawyers are experts in drafting, negotiating and advising on different kinds of settlement agreements for employers. We can help with a wide range of employer settlement agreements in the context of redundancy or other ending of an employment relationship – get in touch with Rhodri Thomas, Helen Monson or Imogen Finnegan and we will guide you through the process. As well as settlement agreements for employers we help business with all aspects of employment law.
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.
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:
Typically, the process of negotiation can take place in one of four scenarios.
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.
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.
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.
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.
The employer will invite the employee to a meeting at a mutually convenient time and place.
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.
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.
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.
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.
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.
Prior to drafting a settlement agreement, a number of issues will need to be considered, including:
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.
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