Settlement agreements
Settlement agreements
What is a settlement agreement?
A settlement agreement is an agreement entered into between an employee and an employer whereby the employee waives their rights to pursue certain employment claims in return for the employer usually offering a termination or compensation payment.
What are the legal requirements for settlement agreements?
The requirements are, as follows:
the agreement must be in writing
the agreement must relate to specific complaints
the agreement must state that the conditions regulating settlement agreements under the relevant statutory provisions have been satisfied
the employee must have received independent legal advice as to the terms and effect of the agreement and in particular its effect on their ability to pursue claims in the Employment Tribunal
at the time of giving the advice the independent legal adviser must have a policy of insurance or an indemnity covering the risk of a claim by the employee
Does the employer have to contribute to the employee’s legal costs?
There is no legal requirement for the employer to contribute but usually the employer will offer a contribution.
Are any restrictive covenants in the employment contract still binding?
It depends on the wording of the settlement agreement. Often the employer will include wording in the settlement agreement that the employee remains bound by the restrictive covenants in the employment contract, or the employer will repeat the restrictions in the agreement. Sometimes the employer may be willing to waive some of the covenants or, for instance, reduce their length but any waiver or change should be covered off in the agreement.
Do all termination payments qualify for the £30,000 exemption?
No. The exemption only applies if the payment is not otherwise chargeable to income tax. Generally, contractual payments, such as pay relating to notice will be subject to income tax and national insurance contributions. However, there are some exceptions. Redundancy payments, for instance, whether contractual or discretionary do attract the £30,000 exemption. Also, some payments, which may be non-contractual, such as for retirement or for confidentiality, do not qualify for the exemption. Payments made to employees due to their disability or injury are completely exempt subject to certain conditions.
Do all termination payments qualify for the £30,000 exemption?
No. The exemption only applies if the payment is not otherwise chargeable to income tax. Generally, contractual payments, such as pay relating to notice will be subject to income tax and national insurance contributions. However, there are some exceptions. Redundancy payments, for instance, whether contractual or discretionary do attract the £30,000 exemption. Also, some payments, which may be non-contractual, such as for retirement or for confidentiality, do not qualify for the exemption. Payments made to employees due to their disability or injury are completely exempt subject to certain conditions.
Is the employer obliged to provide a reference?
Generally, the employer is only obliged to provide a reference when there is a provision in the settlement agreement requiring them to do so, though the employer may have a legal obligation to provide a regulated reference in any event.
Often the employer will agree to provide a standard factual reference, which would usually be annexed to the agreement, as well as refer to its obligations for any regulated reference requests.
