What is a settlement agreement?
A Settlement Agreement is a legally binding agreement between an employer and an employee under which an employee agrees to give up his or her rights to pursue or bring future claims against their employer. Usually, the employer will offer a sum of money in return. The Settlement Agreement is legally binding so long as it is signed by you and your employer. You must also receive advice on the terms of the Settlement Agreement and their effect by an independent solicitor, barrister or other relevant adviser.
It is crucial that you check the final version of the Settlement Agreement to make sure you are happy with all the terms including the sum of money to be paid. Once the Settlement Agreement has been signed, it cannot be changed and you will have no further claim against your employer. So it is important you read the final version in full. We set out below a list of the more common issues that you need to think about when negotiating the draft Settlement Agreement:
The payment to be made
- By what date will they make the payments and how?
- When is the employment to end?
- Do the payments include:
Outstanding car allowance
Any other outstanding payments to be made such as expenses, bonuses and commission payments.
Injury to feelings
Outstanding maternity/paternity/adoption pay
Compensation for new restrictive covenants or confidentiality restrictions
- What will happen to benefits in kind such as:
the company car
the health and any other insurance such as life insurance
Professional memberships (ensure that any practising certificate is returned. Are they going to charge pro rata in respect of any professional subscriptions which continue to the end of the year?)
- Are any deductions to be made?
Are they going to require you to repay a travel loan or part of it?
Have you taken more holiday than you are entitled to pro rata?
Are they going to require repayment of any maternity/paternity/adoption pay which has been received but which is subject to repayment if you leave employment?
It is important that the payment to be made is tax effective. If in doubt you should consult either an accountant or a tax lawyer.
- As a general rule the following payments can be made gross, without deduction of tax provided that they are not otherwise chargeable to tax:
An agreed sum which is for compensation for loss of employment/office up to £30,000.00. This only applies to employees not, for example, equity partners. Any payment in excess of £30,000.00 will be subject to income tax (see comments on this below).
A payment in a discrimination case for injury to feelings where that discrimination occurs before termination of employment and/or personal injury.
- An agreed sum to cover a contribution towards your legal costs provided the sum is paid from your employer direct to your independent adviser. If you receive the payment direct to use to pay your lawyer, taxes may be applied. It may be tax efficient to make a lump sum payment into a registered pension scheme as part of a compensation package. This is because the payment may benefit from tax relief. But you should take advice on this.
- The following payments can generally not be made gross and tax and national insurance deductions will be deducted at source before they are paid to you:
Any salary or other earnings due up to the date that your employment ends
Holiday pay accrued up to the day your employment ends
Compensation for loss of employment/office for any amounts in excess of £30,000.00 (once the P45 is issued the tax will be deducted at basic rate and you must account for any balance in your next tax return, as stated above). From April 2020, in addition to accounting for tax deductions will also be made for the employee national insurance contributions owed on the excess of £30,000.00.
A payment in lieu of notice where there is a provision in your contract that a lump sum payment (which should usually be the equivalent of your basic salary had you worked your notice but it can sometimes include contractual benefits too) can be made in lieu of your notice (this provision does not exist in all contracts)
Consideration for restrictive covenants or confidentiality obligations.
The employer usually wants you to sign an indemnity saying that you will be liable to pay any additional tax that arises on the payments made under the Agreement in addition to tax already deducted before the payment is made. Are you prepared to give this indemnity or not? Is the employer prepared to indemnify you in relation to, for example, any miscalculation in relation to tax which is being deducted at source when the initial payment is being made?
If necessary, take advice. Some initial points for consideration:
Are pension payments to continue beyond the date of termination?
Do you have the information you need about your existing pension entitlements? Ensure that you have the necessary documentation and contact details so that you can be directly in touch with the pension fund.
Does the compensation payment adequately reflect any loss of pension?
Shareholders and share options
If you are a shareholder check your share agreement, for example, you may be required to sell back your shares on the termination of your employment.
How are share options going to be dealt with?
Sometimes it is important in relation to a share option scheme that you are recorded as a “good leaver” as opposed to somebody who leaves “with cause”. Ask the employer to confirm this.
Working Families cannot give detailed advice on share options and it is important that, if necessary, you take independent advice.
How is the employer going to deal with any restrictive covenants that apply in your contract restricting, for example, your ability to work for a competitor for a period of time following termination of employment? If there are any such restrictive covenants in the contract of employment you may want to negotiate that they are either withdrawn or that they will be enforced only in particular circumstances.
The employer will normally require you to agree to a clause in the Settlement Agreement that says that you will not “bad mouth” the company or any of its employees. You can ask for something equivalent in return. Some employers are not prepared to agree to such a covenant on their part because they say that a company cannot promise not to “bad mouth” an individual as it does not have sufficient control over all of its employees. One way of dealing with this is to say that the employer will use its best endeavours to ensure that there is no “bad mouthing” or, alternatively, that it will instruct its employees only to talk about you in the terms set out in an agreed reference/reason for leaving. If there are particularly employees you are concerned may “bad mouth” you, you should consider specifying these individuals in the Settlement Agreement.
Many employers want you to keep secret not only the terms of the Settlement Agreement (e.g. how much money they have agreed to pay you) but also the existence and the circumstances leading up to the Settlement Agreement. This is often very difficult to do particularly if a lot of people know about the negotiations already. Working Families usually suggests that the employee agrees to keep only the terms of the Settlement Agreement confidential – with the exceptions suggested below. If, following negotiation, it is necessary to agree to keep the existence of the Settlement Agreement confidential, you should be able to insist on the following exceptions:
- Close family and friends
- Future employers
- For the purpose of making a whistleblowing protected disclosure in accordance with Part IVA of the Employment Rights Act 1996 (Protected Disclosures)
- For the purpose of reporting, in the public interest, misconduct, or a serious breach of regulatory requirements, to a regulator;
- For the purpose of reporting an offence or suspected offence to the police or other law enforcement agency and/or co-operating with a criminal investigation or prosecution
- For the purposes of reporting, in the public interest, any serious wrongdoing to the police or other law enforcement agency or a relevant regulator or an equivalent person or entity which has a proper interest in receiving that information in the public interest
- For the purposes of seeking medical advice from a qualified medical practitioner or for therapeutic reasons
- Professional/legal advisers
- Your Trade Union
Statutory authorities such as the Inland Revenue and the Job CentreIt may be advisable not to discuss the settlement with friends and in particular with work colleagues because you may be asked to warrant (promise) that you have not previously discussed the terms of the Settlement Agreement with anyone If you have been required to give a confidentiality agreement it should be made clear to you:
- Who you can talk to about the confidential issues;
- If there are any time limits on the confidentiality;
How you can talk about your role in future interviews. You may also be asked to warrant that you have not been offered or do not expect to be offered another job before entering into the settlement agreement.
In return for any agreed payment, your employer may ask you to agree to give up all possible future claims you may have against the company. The following categories of claim are excluded from this, and you cannot agree to give up these future claims:
- Claims in respect of unknown personal injuries (these may not surface until some time after the Settlement Agreement has been signed). This differs from personal injuries known at the time of the Settlement Agreement or related to a discrimination claim, which an employer will likely seek to exclude. Working Families cannot give advice about personal injury claims.
- Claims in respect of accrued pension rights (again, a claim may not surface for some time). Working Families cannot give detailed advice about pension rights.
- Claims other than those arising out of your employment or its termination.
It may also be possible to exclude the following – although many employers will not agree to this:
- Any claim relating to any future employment relationship. For example through applying for a job or through a takeover/transfer of undertaking an employer may either employ or have the opportunity to employ you in the future. If they decide not to employ you or to dismiss you because of the trouble that you have caused in the past, this could be unlawful victimisation under the discrimination legislation and you should be entitled to bring a claim
- Any claim for victimisation after the Settlement Agreement is signed e.g. following the provision of a bad reference – for this reason you should ask for the details of any reference to be specified in the Settlement Agreement.
- Claims arising after the date of the Settlement Agreement. Since the basis for the agreement is to achieve a clean break most employers will not agree to this.
In addition to payment of compensation the employer may be prepared to pay for out-placement counselling. This is often very valuable and you will be entitled to a number of sessions with a specialist consultant who can assist you with finding alternative work.
An important part of the Settlement Agreement is often the reference. This can be agreed through a Settlement Agreement. It is not within the power of a Tribunal to order one. Most employers will only agree to give a factual reference which states the dates of employment and your job title and will agree that the only communication with prospective future employers will be in the terms set out in the reference.
If you are able to agree a personal reference, it is often a good idea for you to write it as a first draft upon which the employer can then build. It may or may not be that you want to put an agreed reason for leaving in the reference.
You may want to agree with the employer in your Settlement Agreement an agreed form of internal or if appropriate, external announcement. You may want to produce a first draft which you can agree and adapt further with your employer.
Job Seeker’s Allowance and other benefits
The position with Job Seeker’s Allowance, which you can claim if you meet the eligibility requirements (set out on the Department for Work and Pensions website), is usually that if you have left your job without good reason or because of your behaviour you will not be entitled to claim Job Seeker’s Allowance. It may be worth checking with the Department of Work and Pensions before you agree a reason for leaving with your employer. It may be better that the reason for leaving is recorded as redundancy as this may assist you to claim Job Seeker’s Allowance. Please note that many means tested benefits (benefits that are payable if the household income is below a certain level) are generally restricted if an individual’s savings are too high. Again, you should check with the Department of Work and Pensions for details (www.dwp.gov.uk).
Mortgage Protection Policy
It is important to check the terms of any mortgage protection policy for exclusions to making payment. If the policy will only make payments if you have not left voluntarily it is important for the agreed reason for leaving to reflect this. For example, it may be preferable for the purposes of claiming on the mortgage protection policy to say that you have been made redundant rather than that voluntary “parting of ways” has been agreed.
Claims against you
If you think that your employer may have a claim against you then you should consider negotiating for a clause in the Agreement saying that it compromises claims against you as well as claims by you.
What is a COT3?
A COT3 is an agreement which records the terms of settlement of an employment tribunal claim (or potential claim) which has been agreed between you and your employer with the assistance of a conciliation officer employed by ACAS. This agreement does not need to be recorded on a COT3 form. It can be agreed between you and your employer in writing or orally with the help of a conciliation officer and it will still be valid and binding.
When you have reached an agreement with your employer and this has been communicated to the conciliation officer the agreement cannot be changed. You need to ensure that you are happy with the terms reached before you communicate them to the conciliation officer. If a COT3 has been drafted check the final version and ensure you are happy with all the terms.
When the COT3 has been agreed, the tribunal will no longer be able to hear your claim. If you have issued a tribunal claim, your conciliation officer will notify the tribunal that the claim has been settled.
Unlike Settlement Agreements, there is no requirement for you to obtain independent legal advice for the COT3 to be binding. But your conciliation officer should explain the terms of the COT3 and their effect.
The common issues to consider when negotiating a COT3 will be the same as are set out above in respect of Settlement Agreements. However, some additional points, specific to COT3 are set out below:
- Payment – timing of the payment will be an issue for both parties. Your employer will want to ensure that the proceedings have been concluded before payment is made whereas you will want to continue proceedings in the event that payment is not made in accordance with the settlement terms. You should push for payment to be made within 14 days of the COT3 being signed.
- Full and final settlements – a COT3 settlement will, unless expressly stated otherwise, only operate to settle the proceedings specified in the agreement. Any references to payments made in full and final settlement will need to be expressly given and will be limited to claims which you and your employer were aware of at the time. Your employer may seek to settle future claims – you should resist this.
More information on negotiating a settlement agreement can be found here.
If you have further questions and would like to contact our advice team please use our advice contact form below or call us.