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What you need to consider before taking a settlement agreement

Legal Review with Coffin Mew

What you need to consider before taking a settlement agreement

Andrew Egan, senior associate at Coffin Mew

Andrew Egan, senior associate at Coffin Mew, explains what you need to consider before taking a settlement agreement from your employer.

I’ve recently seen several clients regarding advice on settlement agreements which they have received from their employers, either as a result of being made redundant or for another reason relating to them leaving their employment.

Problems at work sometimes get resolved through talking, mediation or formal disciplinary or performance management procedures.

However, when these options don’t work or may not be appropriate, a settlement agreement could be used to end an employment relationship or settle a dispute.

A settlement or severance agreement, formerly called a ‘Compromise Agreement’, is a legally binding contract whereby an employee waives their statutory and contractual rights to bring employment-related claims against their employer in exchange for being financially compensated, usually with a tax-free payment.

For the agreement to be legally binding and enforceable, it must contain certain provisions; it must be in writing and the employee must obtain independent legal advice on the terms of the agreement and the effect of the agreement on their employment rights.

It’s usually the employer who proposes a settlement agreement, but sometimes the employee may suggest this as a means to resolve a dispute or grievance.

Settlement agreements are voluntary and usually reached through a negotiation process.

Going straight into making settlement offers to employees carries risks for employers, which need to be dealt with carefully.

Settlement agreements offer a swift resolution and are a generally quicker and less stressful option.

In deciding what to offer an employee, employers would consider the potential legal and other costs of resolving the issue without a settlement agreement, the time involved in a redundancy consultation, disciplinary or performance management process, the employee’s terms and the reasons for offering the settlement.

It’s important for employees to ensure the agreement covers all matters affecting their employment terms; confidentiality and restrictive covenant clauses may or will still be binding on the employee, which may affect their future employment prospects and opportunities.

It’s normal practice, although not legally required, for the employer to contribute towards the employee’s legal costs in having to take legal advice, which the employer usually pays direct to the employee’s legal adviser.

It’s a good time for employees to review their pension position, look at retirement options if relevant, look for career support and assistance or explore other work opportunities.

More commonly now, many employees look to become contractors and work self-employed in their own business, providing consultancy or similar services.

Employees will need to consider such things as:

  • What happens about payment of annual bonuses or commission – will they get paid and for what period?
  • What are the tax implications on payments being made? Compensation paid under settlement agreements can often be made free of tax and National Insurance contributions, up to a value of £30,000.
  • Are there any social media restrictions or requirements in terms of disclosure of the agreement and the terms?
  • What announcements will be made to the employee’s work colleagues? What about external communication to customers, suppliers and other third parties of the employer?
  • What sort of reference will the employer provide and is this important? A reference can help the employee find a new job faster, thus reducing the financial impact of their departure from the employer.

Directors may have different matters to consider and may need to think about what happens to their shares:

  • Do they have to transfer them to their employer’s company?
  • What are the tax implications? These can be complicated.
  • Do they have to resign as a director?
  • Is their personally liability still covered by directors’
    liability insurance?

Coming to a settlement agreement can be straight-forward, but can also be a stressful time.

Employees will want to take advice quickly and have their agreement explained to them in advance.

Any negotiations with their employer can then be dealt with by their legal adviser as soon as possible.

At Coffin Mew, we can meet or call you early into the process and deal with these matters quickly.

If you are offered a settlement agreement, please get in touch with our employment team to see how we can help.
(01635) 917496

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