Monthly Legal Q&A

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What is a settlement agreement and what are the main considerations for employers when entering a settlement agreement?

What is a settlement agreement?

Formerly known as ‘compromise agreements’, settlement agreements are just that: an agreement to compromise in order to settle a potential employment issue.

They act as a legally binding contract between the employer and the employee, and can be designed to contain a number of clauses to protect both the employee and the employer in the future.

Employers can opt to pursue a settlement agreement as a means of avoiding undergoing lengthier processes, such as performance, disciplinary and redundancy procedures.

Settlement Sum

The settlement sum can vary greatly depending on the nature of an individual’s employment and the reasons for their employment relationship coming to an end.

The settlement sum can be paid tax free up to a sum of £30,000. However, the taxation of termination payments is expected to simplify in 2018, with draft legislation requiring employer NICs to be paid on all payments above £30,000. It will also render all payments in lieu of notice taxable whether they are contractual or not.

Waiving rights to claim

Settlement agreements can be an incredibly useful tool for employers, not least because as part of the terms of the agreement the employee will be waiving any right to bring an employment or civil claim relating to any of the issues stipulated in the agreement. This can include potential claims relating to unfair dismissal, discrimination, or breach of contract.

Agreed references and announcements

For the purposes of a smooth transition and maintaining an amicable relationship with former employees, settlement agreements can be designed to include an agreed form of reference and an announcement. The provision of an agreed reference may often be included in the terms of a settlement agreement in order to improve the employee’s employment prospects moving forward, and can act as a further incentive for an employee to enter into a settlement agreement.

In addition to this, parties can agree an announcement to circulate around to the employee’s former colleagues and other third parties.

Non-derogatory statement clauses

Settlement agreements can also be formulated to include non-derogatory statement clauses, effective on both the employee and employer as a means of avoiding reputational damage stemming from the termination of employment. Such clauses are designed to prevent ex-employees making negative comments about their previous employer in the future, and vice versa. Unsurprisingly, this handy tool is a very common feature in settlement agreements.

Confidentiality Clause

Confidentiality clauses are another common feature of settlement agreements, whereby the existence and terms of the agreement itself are kept confidential, save for discussions with legal advisers, specified employees of the employer and close family members of the employee as long as they also agree to keep the existence and terms of the agreement confidential.

Legal Adviser Contribution

It is worth noting in order for a settlement agreement to be legally binding an individual has to seek legal advice from a qualified legal adviser (a solicitor or a qualified union representative) on the terms of the agreement.  As a result whilst employers are not obliged to make a contribution towards the employee’s legal fees in obtaining such advice, it is good practice for employers to make a small contribution towards such fees in the sum of £250 and £350.

Forthcoming changes to public sector exit payments

Anticipated legislation was due to come into force in 2016 which proposed introducing an overall cap of £95 000 on exit payments made to public sector workers on termination of their employment, along with a proposal that should certain public sector employees return to a role within the public sector and within a certain period of time there would be an expectation for them to repay some or all of the settlement sum. 

Such legislation is still not yet in force, however it is anticipated movement will be made in relation to this in the near future, so watch this space.

What is the difference between a settlement agreement and a COT3 agreement?

Settlement agreements do bear some similarities with COT3 agreements in the way in which they serve to settle a dispute in a legally binding manner. Unlike settlement agreements, COT3 agreements may only be reached through ACAS. These tend to be opted for when a tribunal claim has already been issued or alternatively, following the Early Conciliation process through ACAS (please see the December Q+As for further information on the Early Conciliation process).

Settlement Agreements tend to take a much longer format than a COT3, and must be signed by the parties (including the employee) to be deemed binding.  A COT3 agreement becomes binding once ACAS confirms the terms have been agreed between the parties. Another key difference between the two is their scope: settlement agreements typically seek to settle any and all potential employment claims unlike a COT3 which tends to cover the specific claims subject to the employee’s employment claim or complaint to ACAS.

The most significant tool for an employer in using a settlement agreement is its ability to provide full and final settlement of all claims.

If you require any further advice or guidance regarding such matters please do not hesitate to contact the Employment, Education and Information team at Invicta Law via matthew.waterworth@invicta.law

This is not legal advice; it is intended to provide information of general interest about current legal issues.

 

When can a dismissal be deemed as potentially fair?

When an employer wishes to dismiss an employee they must establish a fair reason for doing so to avoid the employee making a potentially successful claim to the Employment Tribunal for unfair dismissal. The reason cited must demonstrably be the ‘real’ reason that the employer has decided to dismiss the employee, and that there is not a separate, potentially unfair reason that may actually be the ‘real’ reason for the dismissal.

If a dismissal is automatically or potentially unfair, the dismissed employee may make a claim to the Employment Tribunal.

In order to bring a claim for unfair dismissal an employee must have two years’ service with their employer and the claim must be made within three months of the dismissal.

Automatically unfair reasons for dismissal

Employers must be aware that some reasons for dismissal are seen to be automatically unfair, and for these claims an employee does not need to have the 2 years requisite length of service.

The most common reasons for dismissal which are deemed automatically unfair include:

-      For making a ‘protected disclosure’, or whistleblowing

-      In connection with family related reasons such as maternity , pregnancy , parental and adoption leave

-      In connection with health and safety issues

-      For asserting a statutory right

-      Where there is a transfer of undertaking, or potential TUPE right

Potentially fair reasons for dismissal

There are 5 potentially fair grounds on which an employee can be fairly dismissed, these are:

-      CAPABILITY - A reason relating to the capability or qualifications of the employee for performing the kind of work he or she was employed to do;

 

-      CONDUCT - including potentially an accumulation of misconduct incidents or one incident of gross misconduct;

 

-      REDUNDANCY

 

-      STATUTORY BAN - that the employee could not continue to work in his position without contravention, either by himself or his employer, of a duty or restriction imposed by or under statute;

 

-      SOME OTHER SUBSTANTIAL REASON - this is a reason of a kind such as to justify the dismissal of an employee which does not fall within the above grounds; there is no statutory definition of what amounts to an SOSR reason and so this ground is often used where there has been a breakdown in relationships between the employee and employer; where there is a reputational risk, a breakdown of trust and confidence and where there has been a business re-organisation.

The burden is on the employer to show the reason for the dismissal and that it is a potentially fair one.

Did the Employer act reasonably in dismissing the employee for the reason given?

If an employer is successful at establishing a potentially fair reason for dismissal, the employer must also go on to show that they acted reasonably in dismissing the employee for that reason.  In order to satisfy this ‘test’ an assessment will be had as to any processes the employer followed, and depending on the reason for the dismissal whether the employer followed the ACAS Code of Conduct.

Ultimately an Employment Tribunal will ask; did the employer’s actions fall within the band of reasonable responses open to the employer?

What is the potential compensation for an unfair dismissal claim?

Awards for compensation for unfair dismissal can be made up of a basic award, and a compensatory award. The basic award is calculated in the same way as a statutory redundancy payment.  The maximum basic award for an unfair dismissal claim is currently £14,670.  The compensatory award which compensates an individual for their potential loss of earnings is capped at 52 week’s gross pay or a maximum of £80,541.

Employment Tribunal Fees

The government has published statistics for the employment tribunal in the quarter following the abolition of tribunal fees in July 2017. Since the fees were scrapped the receipt of employment tribunal single claims has increased by 64% - the highest in four years.

In 2016-17 the mean award for upheld unfair dismissal claims was £16,543. Of the 2139 cases that went to a hearing, 712 of these were upheld with 587 cases being awarded compensation. However, with vast the increase in the receipt of claims following the fee scrappage this figure is likely to increase.

If you require any further advice or guidance regarding such matters please do not hesitate to contact the Employment, Education and Information team at Invicta Law via matthew.waterworth@invicta.law

This is not legal advice; it is intended to provide information of general interest about current legal issues.