A settlement agreement can be a useful way to resolve differences with employees or to end their employment in a way that both parties are happy with. However, the process of creating an employment settlement agreement can be difficult and often requires specialist legal advice to prevent an employment tribunal claim.
At Crombie Wilkinson Solicitors, we can help create a settlement agreement for both employers and employees that will hopefully be beneficial to all parties.
Contact our settlement agreement expert solicitors
What is a settlement agreement?
A settlement agreement is a legally binding agreement between an employer and employee to either terminate the employee’s contract or provide a resolution to a disagreement between the two parties.
The terms of the agreement are usually decided by the employer, but they can be negotiated by the employee. The terms usually include some sort of payment in return for an agreement of no further action from the employee.
The Advisory, Conciliation and Arbitration Service (ACAS) has provided a Code of Practice on settlement agreements. An ACAS settlement agreement usually follows one of their templated agreements.
Settlement agreements: how much should you pay
The amount paid in a settlement agreement depends on a number of factors including: the employee’s salary, notice period, contract length, the seriousness of the claim against the employer, the terms of the agreement, potential loss of earnings by the employee etc.
A reasonable settlement agreement is usually counted as two to three months’ worth of salary, but this can be negotiated up or down.
Tax on settlement agreements
Termination payments made by an employer can include any agreed pay-out amount plus holiday pay and any wages owed. Under current tax laws, the first £30,000 of any termination payment is tax-free. Any payment which either is, or may be considered to be in lieu of notice – sometimes referred to as PILON – is subject to the usual tax and national insurance deductions.
Types of settlement agreements
Settlement agreements are used for two main reasons:
- End a contract: This type of agreement offers a termination of employment, under agreed circumstances and with an agreed pay out.
- Resolve a dispute: This type of settlement agreement doesn’t end in the termination of employment and is mostly used to resolve a major dispute or claim.
When considering a settlement agreement, there are a number of specific legal issues and agreements that must be addressed:
- Post-employment notice pay (PENP) in settlement agreements: If an employee has received a termination payment it must be stated whether there is any PENP tax liability due.
- Without-prejudice conversations and settlement agreements: These conversations are held early on in the settlement agreement discussions and allow open and risk-free feedback from both parties. The aim is to reach a pre-termination agreement.
- Universal Credit: Settlement agreements don’t impact your Universal Credit, Income Support or Jobseeker’s Allowance. You won’t have to pay these back.
Confidentiality of settlement agreements
Whether the settlement agreement is confidential or not is usually down to the employer. Many chose to make it a factor of the agreement. These are sometimes called ‘gagging clauses’ as they prevent people from talking about the agreement.
Usually, the confidentiality clause is around the terms and, sometimes, the existence of the agreement. It may also cover the reasons for the agreement and, if a termination takes place, why the employee was asked to leave.
It’s worth noting that this does not impact whistleblowing laws. A settlement agreement does not prevent someone from speaking up under the Public Interest Disclose Act 1998.
ACAS code of practice for settlement agreements
ACAS has provided a code of practice for settlement agreements that focus on the confidentiality aspects of the pre-agreement discussions. In section 4 of the ACAS code of practice, it covers the legal conditions that must be met.
- The settlement agreement must be in writing.
- The agreement must relate to a particular complaint or proceedings.
- The employee must have received advice from an independent adviser on the terms and impact of the agreement, along with its effect on the employee’s ability to pursue that complaint or proceedings before an employment tribunal.
- Any independent adviser must have a contract of insurance or professional indemnity insurance covering the risk of a claim by the employee in respect of loss arising from that advice.
- The adviser must be identified in the agreement.
- The agreement must state that the applicable statutory conditions regulating the settlement agreement have been satisfied.
It’s worth reading through the ACAS guidelines before you begin any settlement agreement process.
Our Solicitors Fees for Settlement Agreements
We are well known for our expertise in the field of employment law, assisting in the creation and enforcement of settlement agreements, and providing advice during the discussion period.
Our settlement agreement solicitors charge on the basis of hourly rates ranging from £225-£265 per hour (plus VAT at 20%(£50-£53)).
Get in touch for more information on our pricing.
What are some factors that could make settlement agreement legal fees cost more?
- If it is necessary to make or defend applications to amend claims or to provide further information about an existing claim
- Defending claims that are brought by litigants in person
- Making or defending a costs application
- Complex preliminary issues such as whether the claimant is disabled (if this is not agreed by the parties)
- The number of witnesses and documents
- If it is an automatic unfair dismissal claim e.g. if you are dismissed after blowing the whistle on your employer
- Allegations of discrimination which are linked to the dismissal