Received a Settlement Agreement? 5 Questions to Ask

A Settlement Agreement (formerly known as a Compromise Agreement) is a legally binding agreement between an employee and an employer. Essentially, the employee agrees to waive any employment-related claim that they may have against their employer, in exchange for the financial terms under the Settlement Agreement.

Settlement Agreements are commonly entered into shortly before or after the termination of an employee’s, often where there is a dispute between the parties or when redundancies are being made. It could be used in almost any work situation where neither party wants a prolonged or messy exit strategy, and want to resolve it as quickly as possible.

When signing a Settlement Agreement, here are 5 key questions to consider before signing:

1. Are there any claims you may have against your employer?

It is important to understand the potential value of your claims, to know whether you are receiving a fair offer under the Settlement Agreement. At Franklins Solicitors LLP, we discuss the events leading up to you receiving your Settlement Agreement in order that you can be fully and properly advised of your potential claims and their value.

2. Has your notice period and holiday pay been taken into consideration?

If you are not working your full notice period, or if you are to be placed on garden leave, this should be included in the Settlement Agreement. It is important to question if your employer is paying a sum in lieu of notice; since 6^th April  2018, any payment in lieu of notice should be taxed. Furthermore, if you have any holidays remaining that you have not yet taken, this should also be included in your Settlement Agreement.

3. Are you paying Tax on your Settlement Agreement?

The first £30,000 of the compensation paid under a Settlement Agreement should be free from PAYE tax and NI deductions. If the Settlement Agreement includes compensation that exceeds the £30,000 limit, any remaining compensation payment will taxed for PAYE but will not be subject to NI deductions. As above, any payment made under the Settlement Agreement in respect of notice pay should be taxed.

4. Are there any Post-Termination Restrictions (Restrictive Covenants) in your contract of employment?

If your contract of employment contains restrictions which apply to you after the termination of your employment, these may apply to you after your employment has ended with the company. We will review your Settlement Agreement and advise you on this position, as well as considering whether these can be negotiated or waived entirely.

5. Are all the agreed terms written in the Settlement Agreement?

A Settlement Agreement will often contain a clause which confirms that, if something is not written in to the Settlement Agreement, it is not contractually binding on either party. You must therefore make sure that every term that you believe you have agreed with your employer is clearly written within the Settlement Agreement. If it is not, neither party has any claim under the Settlement Agreement.

It is a legal requirement that you obtain independent legal advice on the terms of your Settlement Agreement. If you have any questions about Settlement Agreements or would like to arrange an appointment with our Employment Partner to discuss a Settlement Agreement, please call Ben Stanton on 01908 660966 or email ben.stanton@franklins-sols.co.uk.