Settlement Agreements – Frequently Asked Questions

1) Why do I need to take independent advice on my settlement agreement?

The law requires that for a Settlement Agreement to be legally binding you must have had independent legal advice from a “relevant independent advisor” such as a solicitor. If no advice is sought or it is but it is not from a relevant independent advisor then the Settlement Agreement will not be legally binding and so not enforceable by either party.

2) What does ‘Without Prejudice and Subject To Contract’ mean?

The without prejudice (“WP”) rule will generally prevent statements made in a genuine attempt to settle an existing dispute via a Settlement Agreement for example, whether made in writing or orally, from being put before the court or employment tribunal as evidence of admissions against the interest of the party which made them. One reason for having the WP rule is the public policy of encouraging parties (or potential parties) to litigation to settle their disputes out of court or employment tribunal. The rationale is that settlement discussions (and, it is hoped, settlement itself) will be facilitated if parties are able to speak freely, secure in the knowledge that what they have said and, in particular, any admissions which they might have made to try to settle the matter, may not be used against them should the settlement discussions fail. The inclusion of the words “without prejudice” will not necessarily bring the communication within the ambit of WP privilege if it is not, in substance, a communication made in a genuine attempt to settle an existing dispute. The wording without prejudice will typically appear on the Settlement Agreement so that subject to the WP rule it cannot be adduced as evidence in a court or employment tribunal at a later date should the Settlement Agreement not be entered into. The words, “Subject To Contract” mean that until the wording in the Settlement Agreement has been agreed and all parties have signed it, it has no legally binding effect.

3) Can I be accompanied to a Settlement Agreement discussion?

There is no legal requirement for the employer to allow you to be accompanied to a Settlement Agreement meeting or discussion. In fact it is quite common for an employee not to have advance warning that they will be entering into a Settlement Agreement meeting or discussion. If you do have advance warning of such a meeting or discussion then you should consider whether in fact it will help or hinder the settlement discussions by being accompanied.

4) Can I raise a grievance about being offered a settlement agreement?

Yes, if you decide that is the best route to go down. Although the offering of a Settlement Agreement normally falls under either the without prejudice rule or the protected conversation rule and hence could not be disclosed in a court of law (which includes an employment tribunal), if the offering of it under either rule acts as a cloak for perjury, blackmail, unambiguous impropriety or improper behaviour then you may have a valid grievance. In this event, if it ever went to court or employment tribunal then a Judge may be able to hear evidence about the offering of the Settlement Agreement and the grievance process which followed because where the offer of a Settlement Agreement acts as a cloak for perjury, blackmail, unambiguous impropriety or improper behaviour it looses its protection from being disclosed in a court of law.  An example of unambiguous impropriety is as follows. A defendant told a claimant that, unless the claim was discontinued, he would commit and procure perjury, and that he would flee the jurisdiction if the claimant won. An example of improper behaviour would be where a woman informs her line Manager that she is pregnant and in consequence of that he offers her a Settlement Agreement to leave the Company as he no longer wants her to work for the Company. That could well amount to sex and pregnancy discrimination and a Tribunal would be able to hear that she was offered the Settlement Agreement should she bring a discrimination claim.

5) Can I bring any claims against my employer after I’ve signed the settlement agreement?

You can only bring those claims which you have not compromised in the Settlement Agreement. Set out in the Settlement Agreement will be those claims that you are giving up bringing in connection with your employment or its termination by entering into the Settlement Agreement. Your Relevant Independent Adviser should take you through the claims you are giving up bringing as part of their advice to you. Claims not set out in the Settlement Agreement as compromised can still be brought and more than likely the Settlement Agreement will expressly state some of the claims you are not giving up. This may include personal injury claims of which you are not aware, accrued pension rights and your right to enforce the terms of the Settlement Agreement.

6) What are the implications to my pension if I sign a settlement agreement?

The Settlement Agreement should expressly set out what will happen to your pension. If your employment is ending under the terms of a Settlement Agreement then typically any payments made by your employer towards your pension will stop when your employment ends.  You or your employer should notify the pension company that administered your pension that your employment has ended and they ask that they confirm in writing what your options are in respect of your pension fund.

In respect of accrued pension rights, the general position is that it is not possible for an employee to waive their accrued pension rights, except in limited circumstances. In any event, many rights in connection with an occupational  pension scheme are typically owed to the employee by the trustees of the pension scheme and not by the employer. As the trustees are not normally a party to the Settlement Agreement they wont be bound by the terms of the Settlement Agreement.

Normally the right to bring a claim for accrued pension rights is specifically protected in settlement agreements. Your relevant independent advisor should be looking out for this.

7) Can my settlement pay out be paid gross? 

Yes up to the first £30,000 as long as it does not amount to earnings under the Income Tax (Earnings and Pensions) Act 2003 (ITEPA). The first £30,000 of payments that fall within section 401 ITEPA are exempt from tax and any excess will be subject to income tax in the normal way. What this means is that an employer cannot put monies such as gross salary, benefits and holiday pay into your tax free lump sum payment. Rather, salary, benefits and holiday pay are all taxable and must be taxed by your employer. Any monies paid by your employer over and above that which do not amount to earnings may be paid tax free up to the first £30,000. Any monies paid over the £30,000 threshold are taxable.

8) What happens if I turn the Settlement Agreement offer down?

If you decide not to enter into the Settlement Agreement then the terms in the Settlement Agreement will not become binding. Your employment will not come to an end simply because you turned the offer down. You maintain continuous service unless and until your circumstances change.

Typically, your employer will tell you what may happen if you turn the Settlement Agreement down and if your employer does not do so, it is worth finding this out as then you will know what the alternative is to turning the Settlement Agreement down before you make a decision on what to do. Settlement Agreements can be offered for a variety of different reasons. This can include situations such as where there is a voluntary redundancy situation or where the employee’s performance is called into question and the Settlement Agreement is an alternative to potentially going through a poor performance procedure.

9) My employer told me the settlement payment is tax-free but the Settlement Agreement I’ve been given says I have to pay tax. Is it really tax-free?

It may be tax free up to the first £30,000. It depends on whether the settlement sum set out in the Settlement Agreement contains earnings in it. Earnings are taxable and so should be paid separately to the tax free settlement payment and not included in it.

10) My boss has said if I do not sign the Settlement Agreement I will be sacked. He is putting me under real pressure to sign what can I do?

By your boss saying that you will get the sack, this is very likely going to amount to improper behaviour.  It gives rise to a number of potential ways forward. What your boss has said may give rise to a claim for constructive unfair dismissal should you resign or could be evidence that your dismissal was a foregone conclusion should you subsequently be dismissed if you decide not to enter into a settlement agreement.  You could consider raising a grievance and/or negotiating a better leaving package. It would be wise however to consider obtaining legal advice from a specialist in employment law without delay as to your legal position and the possible ways forward so you can make an informed decision before you act and so do not prejudice tour position.


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