A settlement (compromise) agreement is a legally binding arrangement between you and your employer – it will usually involve an offer from an employer to yourself to agree to mutually terminate your employment. We will review any proposed settlement agreement that you have been given, and where necessary we will negotiate with your employer so that the final terms are acceptable to yourself.

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Every year, we work very hard to help 100s of people just like you to resolve any workplace issues that they might have, and to help them to reach an amicable settlement with their employer through a settlement agreement.

Our compassionate service from expert employment lawyers means that you avoid the stress, uncertainty, time, costs, risks and career damage that can be associated with pursuing a claim in the Employment Tribunal.

We will work with you closely so that you fully understand the settlement agreement, we also like to understand a little about your personal circumstances so that we can ensure that you get everything you can from the agreement – this means that we will often negotiate with your employer (or their solicitor) on your behalf.

Our service aims are to ensure that you are happy with the agreement and able to move your career forward.

Michael Lewin Solicitors are expert lawyers in Employment and Stress at Work Claims. We offer expert advice on all potential claims you may have against your employer, in both the Employment Tribunal and Civil Courts. We will conduct an initial assessment of your claim for free of charge.  Call us now on 0113 200 9787 or email employ@michaellewin.co.uk to make a claim. Alternatively, click here to make a claim.

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A “settlement agreement” is sometimes called a “compromise agreement”. They are both names for an agreement that is reached between the employer and employee to compromise all, or most of the claims that an employee may have against an employer, either in the Employment Tribunal or Civil Courts.

The law on settlement agreements is contained within s.203(3) of the Employment Rights Act 1996. It is quite a complex area, in that there are certain formalities that need to be met to ensure that an agreement is valid.

In brief, the employee MUST have obtained independent legal advice on the agreement and the agreement must:

  • Be in writing;
  • Relate to a specific complaint;
  • Confirm the identity of employee’s legal advisor;
  • State that the conditions regulating settlement agreements have been met.

Also:

  • There must be in place a policy of insurance that protects the employee if the advice they are given by the adviser leads to a consequential loss.

In order to enter into an agreement, the employment must have been terminated. It is, therefore, important to ascertain what the actual date of termination of employment was. This is important because the negotiations could take a while to be finalised. If they are not finalised before the limitation date for a claim to be issued, then the employee will lose the right to claim in the Employment Tribunal for claims such as unfair dismissal, and unlawful deduction of wages.

As it is mandatory that employees obtain independent legal advice on settlement agreements, the law stipulates that the employer must pay for this advice. Commonly, the fee is anywhere between £150 and £500 depending on the complexity of the agreement and the work involved.

Michael Lewin Solicitors are experts in advising on settlement agreements.

We are able to check the agreement for you, advise you on whether any changes should be made to it, and discuss the consequences of signing it.

Settlement Agreement: The Law and You (Employment Rights Act 1996)

As stated above, the Employment Rights Act 1996 explains what a settlement agreement is, and what it should and should not include. Such an agreement is a binding contract between an employer and former employee to settle actual or potential Employment Tribunal claims. We have listed, above, the six requirements required in order for a settlement agreement to be valid.

Contractual and common law rights are capable of being waived without the need for an agreement. Pension rights can only be waived in a few instances.

Statutory rights (apart from the four exclusions below) can only be waived via a settlement agreement. This means that claims relating to unfair dismissal, discrimination, redundancy payments, minimum wage protection etc, can be waived. The effect of such an agreement is that an employee would no longer be able to pursue a claim for the rights that have been waived in the Employment Tribunal.

Exclusions to Settlement Agreements

There are four circumstances in which statutory rights cannot be waived through a Settlement Agreement. They are as follows:-

  • Some claims under Trade Union and Labour Relations (Consolidation) Act 1992, where there has been a failure to make the appropriate consultations/representations on collective redundancies;
  • Some claims under the Transfer of Undertakings (Protection of Employment) Regulations 2006, including where there has been a failure to inform/consult with employees about a forthcoming transfer of employment, or a failure to pay compensation under the Regulations;
  • Claims for a breach of Regulations 5, 6 and 9 of the Employment Relations Act 1999 (Blacklists) Regulations 2010;
  • The right to statutory maternity/paternity pay or adoption pay.

Restrictive Covenants and Settlement Agreements

Employees should make sure that no post-termination restrictive covenants are introduced into a settlement agreement unless they have already agreed to this in their contract of employment. Where the contract does contain pre-existing restrictive covenants, employees can consider negotiating with their employers for a variation, or waiver, of these in the settlement agreement so that they are less onerous.

It is, however, still possible for settlement agreements to include restrictive covenants where these are agreed with the employee. In these cases, the former employee must receive payment for agreeing to the new contractual term. This payment is subject to taxation.

Important Tax implications

Once a settlement has been reached, there are further issues to consider. The basic tax position is that the first £30,000 is tax free. This has some exceptions, which are complex and on which expert advice should be obtained. In brief, they include:-

  • Foreign service payments may only obtain partial tax exemption;
  • If the HMRC feels that the amount is excessive for the claim settled under the agreement;
  • Payments for outstanding wages, restrictive covenants (as above), notice pay, and holiday pay, for example, are taxable.

Employment claims generally have a very strict deadline, or limitation period. If you wish to enter into a settlement agreement, then you should obtain legal advice quickly upon termination of your employment. Protective proceedings should be commenced if the settlement agreement negotiations cannot be finalised within the limitation period, which is usually three months from the date of dismissal, or the occurrence of a discriminatory act; although this would depend on the facts of each case.

Entering into a settlement agreement can have serious consequences, which is why employees are required to seek independent legal advice before entering into such an agreement. We can assist you with negotiating a settlement agreement, along with advising you in relation to the relevant requirements and technicalities involved.

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