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Settlement Agreements... what should you be aware of?

View profile for Amy Edwards
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You’ve employed Joe Bloggs for 4 years as a Sales Executive. A year ago you noticed a change in his work, failure to meet targets and a lack of commitment to the role. You’ve tried to call him into a meeting to try and discuss matters in order to get a better idea of what’s going on. His attitude towards you and his work has changed and he is not willing to communicate… it's got to the stage where you don’t feel he can work there anymore… what can you do?

Well, you may consider ending the relationship by having a “without prejudice” discussion with the employee to end the employment by mutual agreement by way of a Settlement Agreement. Remember, the without prejudice rule will only apply where discussions are a genuine attempt to resolve an existing dispute between the parties.

Settlement Agreements are very useful tools to an employer. They effectively draw a line under the employment relationship and therefore provide comfort to you that your employee will not bring any employment related claims against you.  

Remember that the terms of the agreement are negotiable! Yes you will have your standard clauses of confidentiality, non-derogatory statements and tax indemnity, but it is an effective way of ensuring that your employee is sufficiently compensated for termination of their employment so as to prevent them from bringing an employment claim. This saves you a lot of time, money and stress by you not having to defend a claim in an Employment Tribunal (even if you would win!). 

There are other things, not only financial ones, that you can use to encourage your employee to enter into a settlement agreement. Some of the things we often see are:  

•    An agreed reference – this is great for employees (especially if you are going down the capability route), but remember your obligations to ensure that it is true, accurate and fair and does not give a misleading impression.
•    Continuation of employee benefits post-termination, i.e. healthcare and car allowance.
•    Outplacement services.

In order for a Settlement Agreement to be legally binding, your employee will be required to take independent legal advice before they sign the agreement.

Some of the common errors we come across when a Settlement Agreement lands on our desk:
•    No specification of when payments will be made – the settlement is the entire agreement between the parties and therefore needs to clearly set out what will be paid to your employee and when;
•    Contractual and non-contractual payments are amalgamated – this can affect the tax status of the ex gratia payment so needs to be expressly separated in the agreement;
•    Payment of a PILON (Payment in lieu of notice) when the contract does not allow it – if the contract does not allow a PILON and you do it anyway, this will amount to a breach of contract. In order to ensure the tax status is protected, make this payment as a “damages payment;”
•    Accrued holidays – specify the number of days and the actual payment due to avoid ambiguity;
•    Mutuality of obligation – an employee is more likely to sign the agreement if they agree to keep the agreement confidential and not make derogatory comments and you agree to do the same;
•    Consider the lacuna period for deferred termination dates  the law is unclear on settling things that may happen. In this instance, ask the employee to re-sign the Settlement Agreement before their termination date and deal with what will happen in the event that the employee commits to an act of gross misconduct before the termination date; and  
•    Restrictive covenants – if there are no restrictions in the contract of employment, do not worry. You can add new covenants in the Settlement Agreement but it will come at a small price.

In my opinion, many employers are of the opinion that Settlement Agreements are very standard and easy documents to produce, because you have used the same document for a number of years. The document has never been challenged, and you thought it was perfect. Laws and best practice change over time, and one size never fits all!

Hopefully this note has highlighted that this is not necessarily the case.

It is so important to make sure you draft the agreement correctly, set out the contractual payments from the non-contractual payments, think about what will happen if there is a future termination and more importantly the validity of the agreement if the employee is dismissed for gross misconduct in the meantime. More importantly, make sure the agreement is valid as this could make a difference between no claim or an expensive Tribunal claim. The purpose of the agreement is to protect you, the employer, so making sure that you take the time to ensure that it is properly drafted and relevant to those individual circumstances.

Even still, its not just the drafting of the agreement that you need to be careful of but the discussions you have before the agreement is finalised as this is just as important. You don’t want to be facing a claim for breach of mutual trust and confidence because you have handled the initial conversation in the wrong way.

If you would like some advice on a Settlement Agreement please contact the team.