Settlement Agreements for employers are vital. If the working relationship between your business and a member of staff breaks down, and the time has come to end their employment, we can work with you to consider all options – and give you a realistic assessment of an appropriate exit package, as an alternative option to a formal process. We can then advise and support you through the process of offering the settlement agreement – to end the employment and protect you against Employment Tribunal Claims.
NB: This page is for employers. If you’re an employee you have been offered a settlement agreement, we can also help you. We appreciate that this can be a very difficult and stressful time for you so our expert Employment lawyers will provide you with clear and practical advice. Visit our Settlement Agreements for Employees page for more information.
What is a Settlement Agreement?
A Settlement Agreement is a legally binding document that concludes claims or potential claims that the employee may have, provided that certain conditions are satisfied. The employer will usually offer a lump sum termination or severance payment that is in effect compensation for their employment being terminated. In return the employee agrees not to bring legal proceedings against the employer.
What can be included in a Settlement Agreement?
A Settlement Agreement can include:
- Payment in lieu of notice and accrued holiday pay
- Payment of compensation
- Continuation of benefits
- An agreed reference
- Provision of outplacement support
- Return of company property
- Restrictive covenants
- Contribution towards legal costs
A standard confidentiality (non-disclosure) clause in a Settlement Agreement will usually state that the employee agrees to keep confidential the existence or terms of the Agreement and will not disclose those terms to any person except to their advisers, relevant tax authorities or as required by law. Confidentiality issues will normally extend to trade secrets and confidential information.
What is the tax position?
The starting point is that all payments relating to employment are taxable and subject to National Insurance Contributions as employment income under Section 6 of the Income Tax (Earnings and Pensions) Act 2003. Typical examples of fully taxable employment income are:
- Salary payments
- Contractual bonuses and commission payments
- Holiday pay
- Payments in lieu of notice
- Consideration for restrictive covenants
However, compensation for unfair dismissal, discrimination, redundancy or other statutory claims are viewed as damages. Genuine compensatory payments paid on termination benefit from an exemption that the first £30,000 of such a payment is not chargeable to Income Tax or National Insurance. Income Tax will be payable on the balance (if any) over £30,000.
Who pays for the legal advice?
An employee must obtain independent legal advice before signing a settlement agreement. There is no legal requirement for the employer to pay the employee’s legal fees for the advice however, in practice, employers will normally contribute towards some or all of the legal costs.
If you are an employee, you can read more about what to do if you have been offered a settlement agreement.
What our clients say:
“As we are a US based firm Stuart was very helpful and accommodating in working with us. It was very helpful to have his level of support while working at a relatively great distance.” Matt Horine, APTech Solids Limited
For more information about how we can help, you can read testimonials from our employment clients
The Employment Team
Stuart Snelson Partner
Employment 01908 689318Stuart is Head of the Employment Department and has over 20 years’ experience advising on all aspects of employment and pensions law. His partner led service provides practical and commercially focused advice to a wide range of local, national and international clients on the whole range of work related matters.
Paula Stuart Partner
Employment 01908 689345Paula has over 20 years’ experience practising employment law and provides clear and practical advice to all clients in all aspects of employment matters. Paula also delivers bespoke seminars to clients to meet their specific training needs. Recent courses include ‘The Essentials of Employment Law’ and ‘Best Practice when Managing Redundancies’