When you are asked by your employer to sign a settlement agreement, you should be aware of the following:
- You are being asked to sign a binding contract which has obligations on both you and your employer.
- You must take independent legal advice on the content of the settlement agreement and your employer will usually offer a contribution towards those legal fees.
What is a settlement agreement?
A settlement agreement is a legal document under which employees agree not to bring any claims (or withdraw any claims they have already begun) against their employer – usually in exchange for money. So, when you sign a settlement agreement you will be surrendering all claims against your employer and will not be able to bring any such claims in the employment tribunal or in the courts.
The common exceptions to the waiver are any claims for breach of the agreement itself (in particular if the company fails to pay all or part of the termination payment), personal injury claims of which you are not currently aware, and any accrued pension rights claims. Your agreement will become legally binding on the date that both you and your employer sign it.
Why do I need legal advice?
The law requires that a suitably qualified legal professional must advise you on the terms and effect of your settlement agreement and in particular its effect on your ability to bring a claim before an employment tribunal. It is vital to get good, expert advice on the detail because once you have signed the agreement, this is binding.
How much will it cost?
Your employer will usually agree to contribute towards your legal fees excluding VAT for advising you on the terms and effect of the settlement agreement. We will be able to advise whether this will be sufficient to cover our advice to you on the agreement and this obviously depends on the specific detail and background of your employment and benefits. We will always try to ensure that all of your legal fees are covered by your employer and our advice will be specifically tailored to your personal circumstances.
It is important to know that any payments for work done or payments made because of a clause in the contract of employment are normally subject to deductions for income tax and national insurance contributions (NICs). This includes a payment in lieu of notice.
Where a further payment is made which is genuine compensation for the termination of your employment, HMRC may treat it as free of tax up to £30,000. This will include any statutory redundancy payments.
Confidentiality and announcements
The settlement agreement will be stated to be “subject to contract and without prejudice”. This means that this agreement and any genuine discussions relating to settlement with your employer are confidential and cannot be relied on at court or tribunal. Once signed, this agreement itself will become an open document which allows you, or the company, to rely on the terms of this agreement at court or tribunal in the event of any dispute. However, the discussions leading up to signing this agreement may remain confidential.
What happens if there is a breach of the settlement agreement?
If you breach any key provision of the settlement agreement (for example, by breaching the confidentiality restrictions), the terms will provide that you reimburse the company for any loss it suffers, including all reasonable legal and professional fees it incurs pursuing you for the breach. We will advise you on this as part of the completion of the settlement and ensure you understand exactly what you can and cannot do as part of the agreement.
Please contact us to get quick, thorough advice on your settlement agreement.