Settlement Agreements – What? When? Why? Who? What to watch out for!
Settlement agreements (formerly known as compromise agreements) are a widely used method of settling employment claims with an exiting employee. It gives both the employer and employee certainty going forward and enables both parties to move on after the employee exits. They are sanctioned by the Employment Rights Act 1996 (ERA 1996) and in particular s203 sets out the criteria that must be used in order to make the agreement valid and therefore enforceable. Under s111A ERA 1996 now they can be used more widely to exit employees without the need for a dispute to have already occurred as was formerly the case.
Is this a licence to exit employees as their face no longer fits or a genuine move to avoid costly litigation for both employees and employers alike?
What are they? They are a contract between an exiting employee and the employer that gives the employee an exit package in return for signing away their employment rights, excluding accrued pension rights and latent/unknown personal injury claims. It is a legal requirement that the employee obtains independent legal advice on the agreement with the employer paying for those legal fees.
Such agreements are so widely used now that many see them as simple with previous templates regularly used. They are however far from simple and previous examples should never be used as some of the following issues show.
When? Before you even broach the subject of giving an exiting employee a settlement agreement, you need to know the mere suggestion or offering of the agreement could, in certain circumstances give the employee a constructive dismissal claim. These circumstances have been limited via the insertion of s111A into the Employment Rights Act 1996 enabling confidential pre-termination settlement agreements, but this does not give blanket protection.
Specifically, s111A ERA 1996 gives employers protection from constructive dismissal claims when they enter into confidential discussions about the termination of employment. It will be a brave employer who enters into such discussions without first having taken employment advice. It is similar to “the without prejudice rule” but also very different. It’s applicability will depend on the individual circumstances of the case, hence the need for advice, but in general terms there must be no “improper behaviour” to render it fair and the employee must be given at least 10 days to consider the offer and take advice. The associated ACAS code details “improper behaviour” and gives examples of what may be considered as such.
Prior to the insertion of S111A offering a settlement agreement in circumstances where there was no genuine inter party dispute, where effectively the employer was saying “you are going no matter what”, gave rise to a constructive dismissal claim, subject to the qualifying period of employment to access future losses etc. Even if an employee does not have the 2 years qualifying service they could still bring a constructive dismissal claim, typically where they are seeking wrongful dismissal damages but also release from post termination restrictive covenants. Under s111A a settlement agreement can be offered where there is no dispute at all. Sometimes this can mean the settlement agreement appears to come out of the blue for the employee, which can bring with its own problems such as uneasonable expectations etc.
How? Often a formerly used agreement is reused for a subsequent employee. However did you know that often doing this enables the solicitor advising the employee on it to know the circumstances of the previously exited employee, risking a breach of confidentiality on the part of the Company. Each agreement, to be binding, must be tailored to the specific employee and their circumstances. Blanket claims lists, which we see all too commonly have been held to be uneforceable. There must be a clause that refers to the specific claims that the employee is raising and then settling and it must cross refer to the appropriate in date legislation. Simply using an old agreement is likely to mean the employee’s specific claims are not addressed and render it unenforceable. Information may be left in the agreement used that refers to the last exiting employee thereby potentially risking the confidentiality of that last exiting employee as well as risking its enforceability.
Each set of circumstances where such an agreement is needed will be different and the employee will be different maybe having different priorities, such as a reference. They can be tailored to address specific problems too. For example, if you have a messy exit of an employee but want to address gossip amidst the workforce an agreed announcement that goes out can be agreed. The confidentiality clauses stop the employee from talking about matters but speculation is often rife, especially in acromonious exits and you don’t want employee’s to think the Company will always settle. An agreed anouncement allows you to control what is said to other staff, customers and suppliers and gives the employee something to say when asked why they left – leaving it open often does more damage than good.
The employee will also need to explain why they left to future employers, recruitment agencies and their family so a blanket confidentially clause is a practical nonsense. It needs to address such realities.
Is there an agreed reference? What if the person giving a reference leaves?
Has the notice pay been properly dealt with. Has pay in lieu of notice (a PILON) been taxed or not taxed properly? Have a number of payments been lumped together risking the whole payment being judged as taxable? Are contractual elements split out and treated appropriately for tax? An agreement to breach where there is no PILON clause still renders the notice payment taxable too, which is one that often catches people out. There are specific rules under s401-403 of ITEPA 2003 as to what makes a payment up to £30,000 genuinely tax-free.
Have you covered off the pension? Do you need to make a statement as to the leaving status of the employee in relation to shares or share options? What about expense claims not yet submitted?
Have restrictive covenants been dealt with in an appropriate manner? Are existing ones enforceable and are new one’s validly stated with separate consideration? This can be an ideal time to put in covenants if they were previously missed or the contract predated their inclusion. If there aren’t well drafted enforceable restrictive covenants then there is nothing to stop those exiting employees from setting up around the corner and poaching all of your staff, customers and work. If the employee’s claims include breach of contract then any restrictive covenants in a contract would fall away. The settlement agreement is a place you can put such restrictions in or restate existing ones to get them back in. As the employee takes advice upon the settlement agreement it also makes any stated restrictive covenants more robust with a greater chance of enforceability.
Who? As you know the employee needs to make sure they take proper advice on the terms and effect of the settlemement agreement, which is a requirement of s203 ERA 1996. Unfortunately lots of solicitors sign off settlement agreements without knowing very much about employment law, as it is seen as a quick rubber stamping exercise. It is far from that. The solicitor needs to advise on what claims the employee could have and to quantify those claims to then assess whether the payments the employee is receiving are fair or not. The solicitor needs to advise on the terms including the taxable status of the payments and possible tax liability. They will need to know the impact caused by the different stated reasons for termination and advise on the post termination restrictions. If the employee hasn’t had proper advice does that cause doubt on the enforceability of the agreement? Possibly. One option could be to provide an exiting employee with a list of known employment solicitors so you know there are going to an expert, which will make negotiating any final parts much more sensible for the Company too. In a mass settlement agreement exercise, perhaps with multiple redundancies where there are enhanced payments a solicitor can come into your offices and see multiple employees so you are not then renegotiating the same agreement with multipole different sets of solicitors.
Therefore you can see as a Company there are many issues to consider relating to settlement agreements.
For further details or if you have or need a settlement agreement please contact Natalie Roach Oak Employment Solicitors on 01869 277692 or Natalie@oakemploymentsolicitors.co.uk.