What is a settlement agreement, who pays and how much money should the employee get? These and other questions are answered in this useful guide for employees.
What is a Settlement Agreement?
A settlement agreement is a written agreement between an employer and an employee, whereby an employee agrees to waive certain employment claims, usually in return for a payment of money. They are frequently used in redundancy situations or where there has been a dispute between the employer and the employee. Settlement agreements are mostly used to bring an employee’s employment to an end, but they can also be entered into where employment is continuing. Prior to 2013, they were called compromise agreements.
Are There Any Rules for Settlement Agreements?
For a settlement agreement to be legally binding and to prevent an employee bringing claims in an employment tribunal they must:
- Be in writing
- Identify a particular complaint
- The employee must receive independent legal advice from a qualified lawyer, a certified union official, or an authorised advice centre worker
- The agreement must set out what statutory provisions are covered
- The statement must state that the applicable statutory conditions regulating settlement agreements have been satisfied.
What Should a Settlement Agreement Include?
As well as dealing with a waiver of claims, an employee may want to ensure that the settlement agreement includes:
- A non disparagement clause
- An agreed form of reference
- Terms dealing with any benefits, share options or SAYE
- A clause allowing the employee to purchase certain items e.g. lap top or company car.
Who Pays for the Agreement?
More often than not an employer will pay a fixed contribution to allow the employee to take independent legal advice on the agreement.
How Much Money Should The Employee Get?
Some websites include a settlement agreement, compensation calculator but, in truth, there is no set amount an employee should expect to receive as it is very dependent upon the individual circumstances.
As a rough guide in a redundancy situation, as an absolute minimum an employee should expect to receive:
- Notice pay (or be able to work their notice period)
- Any accrued and unused holiday entitlement; and
- A statutory redundancy payment.
A statutory redundancy payment is calculated according to a set formula of:
- 1.5 weeks’ pay* for each year in which the employee was 41 years old or above;
- 1 week's pay* for each year in which the employee was over 22 but under 41 years old;
- 0.5 week's pay* for each year in which the employee was under 22 years old.
* A week's pay is subject to a statutory cap and an employee must be employed for two years to receive a statutory redundancy payment and only a maximum of 20 years' service is taken into account.
However it is often possible to negotiate more than the minimum entitlement and a good lawyer should explain what possible claims the employee has, what they are worth and how that compares to what is being offered together with an assessment of the likely the costs and risks involved in taking any claims further.
What about Tax?
It is often possible to pay the first £30,000 of any compensation amount tax free. The precise tax treatment will depend upon individual circumstances.
Why Use Moon Beever?
Our Employment Law Team are experienced employment solicitors and regularly deal with Settlement Agreements. We can draft agreements and negotiate terms on your behalf. We give clear, concise impartial advice and are transparent on costs.