Getting you the best deal
Settlement agreements (formerly known as compromise agreements) are commonly used by employers as a way of settling disputes or potential disputes with employees relating to their employment or the termination of their employment. The employer will usually pay an agreed sum of money over and above what the employee is entitled to receive under contract / statute, and in return the employee will agree to waive their right to bring a claim.
Why do I need legal advice?
Given that the employee will not be able to bring a claim once they have signed up to a settlement agreement, it is crucial that they are happy with the proposed deal.
It is the job of the employee’s legal adviser to advise the employee as to whether or not they are getting a good deal. To do this, they will need to:
- Discuss the background with the employee in detail;
- Consider what payments the employee is legally entitled to receive, the value of those entitlements (e.g. notice pay, payment in lieu of accrued untaken holiday pay, redundancy pay);
- Identify any claims or potential claims the employee may have against the employer (e.g. a claim for unfair dismissal or discrimination);
- Assess the merits and value of those claims; and
- Check that the sum offered by the employer is more than what the employee is legally entitled to receive and includes an additional sum to compensate the employee for giving up any claims they may have. This sum should be reasonable in the circumstances. If the employee has a strong claim or potential claim worth more than the amount offered by the employer, it may be that the employee is not getting a good deal.
How can I get a better deal?
There are a number of things to think about when trying to maximise the payments to be made to you. For instance:
- If you are supposed to work notice, is your employer prepared to allow you to leave immediately and pay you in lieu instead?
- Have any contractual payments been missed, for example enhanced redundancy pay, bonus payment or pro-rata bonus payment?
- If you have a strong claim or potential claim against your employer, you can use this as leverage to try and get more money or otherwise improve the deal on offer. Employers will usually want to avoid employment tribunal claims being brought against them as they are time-consuming and expensive – particularly as usually, each party bears its own legal costs. The more evidence you have to support your claims the stronger your bargaining position will be, so make sure that you keep copies of all documents and write notes of conversations which evidence your employer’s bad behaviour.
- Check the tax status of the settlement payments to be made to you. The first £30,000 of genuine ex-gratia payments (including statutory and enhanced redundancy payments) can be made free of tax and national insurance contributions. Whether a notice payment can be paid free of tax and national insurance deductions will largely depend on the provisions of your employment contract. If it contains a payment in lieu of notice clause (PILON), it is likely that any notice pay will be taxable. However, if there is no PILON clause, or if the employer has breached other obligations to you, notice pay can often be paid gross, saving you at least 20 per cent.
Take for example an employee who has worked for the same employer for seven years but has just been told that they have been selected for redundancy. The employee believes that the selection process was manipulated, and that he has been given lower scores than deserved. The employer has told the employee that he can appeal the scores before his selection is confirmed, but as an alternative has offered him a settlement payment of £5000 gross, under which his employment would terminate immediately. The latter option is conditional on the employee signing a settlement agreement.
The employee is 50 years’ old. His salary is £400 per week gross, and he is entitled to seven weeks’ notice. He has no accrued untaken holiday outstanding and no other contractual payments or benefits are due to him. He has no PILON clause in his contract of employment.
Should his employment terminate for redundancy, the employer would need to give him seven weeks’ notice or pay him in lieu of this (i.e. 7 x £400 = £2800). As there is no PILON clause in his employment contract, it is likely that this sum could be paid without deductions for tax and national insurance.
The employee would also be entitled to a redundancy payment. Statutory redundancy payments are calculated with reference to the employee’s age and length of service. Basically, employees with over two years’ service are entitled to a week’s gross pay (capped at £450) per year of service until the age of 41, after which they are entitled to a week and a half’s pay for each year of service. The maximum number of years to be taken into account is 20. The employee in this example would be entitled to £4,200 redundancy pay (i.e. 7 years x 1.5 multiplier x £400 gross weekly wage).
Based on the above, the employer should receive at least £7,000 in contractual entitlements. The employee’s adviser would therefore advise him to ask for more money as the deal on offer does not even cover what he is legally entitled to receive and gives no benefit to the employee for waiving his claims.
If, on the other hand, the employer had offered to pay the employee £10,000, the adviser may be happy to advise the employee that the £3,000 ex gratia was a reasonable figure to compensate for waiving his claims, including the potential claim for unfair dismissal.
Whilst £10,000 may be a good deal in these circumstances, it may not be such a good deal in other circumstances. For example, if the employee had not been offered a right of appeal and / or felt that they had been discriminated against for some reason (see note on discrimination), and /or had additional benefits such as enhanced redundancy pay, bonus, final-salary pension, private health care, company car etc., his potential claims could be worth more. In these circumstances, the adviser would probably say that the £3,000 ex gratia on offer is not enough to compensate the employee for what he would be giving up.
Employment law is complex. Whilst this note gives some good tips about settlement agreements, it does not give you comprehensive advice about your legal entitlements or what you should do if you feel that your employer has behaved badly. You will need to speak to an employment specialist to give you this advice, so please do give us a call.
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