What is a Settlement agreement
A settlement agreement is a legally binding agreement between an employee and employer setting out the terms on which employment is terminated or a dispute about it is to be resolved.
Examples of when a Settlement Agreement is used include:
Termination by mutual agreement
To settle an existing Employment Tribunal claim when such an agreement can be used.
The effect of a Settlement Agreement
It will provide certainty for both parties and it is very important that an employee understand what is being agreed to before signing such an agreement.
To be effective the Settlement Agreement must confirm that the employee has received independent legal advice from an appropriately qualified person (usually a solicitor or qualified trade union adviser) (s.203 Employment Rights Act 1996).
If you are an employee the single most important thing to understand about a Settlement Agreement is that in signing the agreement and accepting the settlement terms you specifically exclude your right to make a claim against your employer in the Court of Employment Tribunal.
In most cases the employer will pay or contribute towards the legal expenses incurred in receiving the legal advice on the agreement.
Once an Settlement Agreement is made the only claims that can be made will be to enforce its terms. Usually claims for personal injuries and accrued pension rights are exempted.
Whether tax is payable depends on how the payment is made up.
Tax and national insurance will normally be paid on any accrued wages and holiday pay.
Generally, the first £30,000 of a payment made as compensation for loss of employment is tax-free. Redundancy payments up to £30,000 (both contractual and statutory) are usually tax-free.
Some benefits such as continued enjoyment of healthcare or company cars are exempt tax-free.
Compromise Agreements normally provide that should the Inland Revenue (HMRC) find any tax or National Insurance to be payable it is the responsibility of the employee to pay it.
Typically the agreement will also cover other outstanding employment issues such as:
The date by which payment must be made;
If you are an employee and decide not to enter into, a Settlement Agreement it is vital to remember there is a time limit for bringing most employment tribunal claims (normally three months).
For more information telephone (01789) 292238 or contact Edward Jeffery