Settlement agreements are frequently used by employers to satisfy themselves that they have achieved their desired outcome of a “clean break” when an employee departs. Very often the legal formalities will not have been completely achieved, but the parties are satisfied and are willing to move on.
What are these formalities?
The agreement must be in writing;
It must relate to the particular proceedings, complaint or dispute;
The employee must be advised on the terms and effect of the agreement from a relevant independent adviser;
The adviser must have insurance or an indemnity for members of a professional body;
The agreement must identify the adviser; and
The agreement must state that the conditions for Settlement Agreements under various statutes have been satisfied.
None of the above looks particularly onerous in theory. However, the challenge comes with settling the “particular proceedings”. In order for the agreement to be effective there must be a dispute which it is settling and comply with the other legal formalities. The challenge here is that it is not possible to list every possible employment claim and settle them. Also, some claims cannot be settled through a settlement agreement. Very often agreements have long lists of claims. Strictly speaking, these do not work but the employee signs and is happy to have extra pay and the agreement may well have additional protections requiring repayment if the employee sues in breach of the terms of the agreement.
In addition recent changes, rightly brought about by the #metoo campaign, have prevented them being used to “gag” employees and they cannot be secured by “improper” behaviour on the part of the employer.
Who is the relevant advisor?
Relevant Independent advisers can be qualified lawyers; certified union officers, officials, employees or members or a certified advice centre worker. If you are unsure whether the adviser qualifies ask to see evidence. Typically an employer will contribute to the costs of this advice.
What about Tax issues?
Using Settlement Agreements does not change the tax position on termination or create a more beneficial tax regime but it does provide an opportunity to reflect on what the tax liabilities are. Make sure any contractual payments are separate from any ex gratia payments. Moreover, employers now need to remember that if they pay more than £30,000 on an ex gratia basis that they will pay Employers NICs on the excess over £30,000. Employers will also need to make sure they have calculated the Post Employment Notice Pay (or PENP) and account for this if the departing employee is being paid their notice in lieu.
In the current environment employers may wish to consider using Settlement Agreements as part of any proposed redundancy exercise, particularly if there are any enhanced terms.
Check the employment contract!
Settlement Agreements provide an opportunity to reflect upon the terms of the existing contract and to consider whether the provisions in it relating to confidentiality, post termination restrictions and non-disparagement are adequate; if not they can be enhanced. They also provide an opportunity to agree a reference and secure agreement around the return of company property.
Advising employee representatives and groups of employees – our experience
At the present time many employers will be considering how they respond to the Covid-19 pandemic, the easing of lockdown and the ending of the JRS. For many this may involve the need to collectively consult about redundancies involving employee representatives. Part of that process may involve considering whether to use settlements agreements for those selected and engaging with a single legal firm who might be used to advise employee representatives during the consultation phase and then advise on settlement agreements for the selected employees. The advantage to the employer is that it will achieve economies of scale, with reduced costs and only one lawyer asking for amendments to agreements, leading to less internal processing time. Planning ahead and understanding the process could be invaluable at this.
We have acted for employees in these circumstances on many occasions; have specific training tools for the employee representatives and have, when acting for the employer, organised independent lawyers to advise the employees. This has always ensured a smooth transition for the employer and given the employees the benefit of having a lawyer on hand to advise.
Discussions around terminations are likely to be taking place for many employers in the weeks ahead. Planning how those discussions are to take place, the terms to be agreed and whether to seek the security of settlement agreements and how to involve lawyers for the departing employees need to be taken into account.
Employers should ensure that they do their homework before putting pen to paper – check contracts of employment, consider tax issues ad consider whether additional terms are required.
Does your business need help in preparing or negotiating settlement agreements? Do you want to understand more about using settlement agreements as a business tool? Would having advice or training around managing workforce redundancies or changes benefit your management or HR population? Or would you like to discuss our rates in advising a group of employees as independent advisers (virtually or in person)?
We also advise individuals on the terms of their settlement agreements.
Consistent with our policy when giving comment and advice on a non-specific basis, we cannot assume legal responsibility for the accuracy of any particular statement. In the case of specific problems we recommend that professional advice be sought.