Settlement Agreements – The questions you were afraid to ask

Settlement Agreements are one of those things that you either know about them, or you don’t. Of course, one would hope to not need to know about them because they are exactly what it says on the tin – a settlement of a dispute of sorts – but, this could also be a positive thing so don’t shy away from it too quickly.

Settlement Agreements (or SAs as I will lovingly refer to them below) have become more and more common, especially in the current climate when many people are facing redundancies as a result of the Covid-19 Pandemic. This means that they are no longer an obscure idea that takes places behind closed doors with the employee quietly leaving the building with an envelope of cash in exchange for their silence (the confidentiality and payment clauses are more sophisticated).

So, we appreciate that this is a big topic and can be quite daunting. Therefore, I have collated some of the biggest questions raised about SAs and have tackled those below.

What is a Settlement Agreement?

SAs are used in many different contexts but here I will focus on a scenario where they are used in Employment law. In short, it is a contract between the employer and employee that confirms an agreement reached between the parties. It could be in settlement of an existing dispute (for example where an employee has raised grievances regarding mistreatment by the employer) or settling the terms of an amicable departure (for example where an employee is retiring from the business).

How does a settlement agreement work?

This is not an exact science, but usually the employer will propose a settlement (or a protected or off the record conversation) and the parties will negotiate and agree for it to be formalised by way of a SA. The employer will produce the SA for the employee’s consideration, the latter will then take legal advice on it and, once agreed, the parties will sign the SA.

Can I negotiate a settlement agreement?

In short, yes.

The longer answer is that it depends on the circumstances. In some cases, the employer will have made their best and final offer already with what is on the table. However, it is also the case that if you don’t ask then you don’t get. We suggest that, if you do seek to negotiate, you do this with a reasonable approach and make a reasonable and justifiable counteroffer.

Do I have to accept a settlement agreement?

No, you do not have to accept anything. However, bear in mind that it is likely to be in your best interest to accept it, even if not in its offered form.

Do I have to take legal advice on the settlement agreement?

Yes, it is a requirement under the legislation that you take legal advice from an independent solicitor who will sign the adviser’s certificate (which is usually annexed to the SA). The purpose is to ensure that you are aware of all of the clauses and the impact that they have on you and your ability to pursue any further action against your employer.

The one thing to remember is that the legal advice that you take is your advice – this means that you can appoint your own legal representative for this purpose and they are acting for you and not the company (even though your employer will make a contribution towards legal fees).

What are the tax implications of a settlement agreement?

There is a misconception that SAs are tax free, full stop. This is not true, unfortunately. There are two elements that can be paid under a SA:

• any contractual benefit that may be agreed to be paid such as notice period as a lump sum payment, accrued but untaken annual leave or bonus payments. Those will be taxed at your usual tax rate; and
• any ex-gratia or ‘goodwill’ element can be paid tax free, if agreed between the parties, up to a maximum of £30,000.

Can a settlement agreement be withdrawn or rescinded?

Technically, yes it can be. An employer can decide that they do not want to proceed with a SA even after they have offered it, as long as it has not been signed by the parties. However, in our experience, so long as the parties are negotiating in good faith and seeking to agree the terms, then this is unlikely to happen.

We appreciate that you may have other burning questions, and I may have only just scratched the surface with all of the above questions. Please appreciate that this is not intended to replace the need for and requirement of obtaining independent legal advice. Should you be faced with a Settlement Agreement / SA and have any further questions, please do not hesitate to contact our team and we will be happy to assist you further.

*Disclaimer: The information on the Anthony Gold website is for general information only and reflects the position at the date of publication. It does not constitute legal advice and should not be treated as such. It is provided without any representations or warranties, express or implied.*