Settlement Agreements – Top 10 Tips For Success
Key Contact: Claire Knowles
Author: Adam McGlynn
- Plan B. Settlement agreements can be useful tools, but there is no guarantee that they will be successful. Perhaps the employee will refuse to engage on principle or perhaps negotiations don’t reach reasonable terms. A backup plan is, therefore, vital. Whether it is a disciplinary procedure, redundancy procedure, or otherwise, it is important to understand how the company can act unilaterally if the settlement agreement cannot be agreed.
- Negotiations Started Long Ago. Settlement agreements will be easier to agree on preferable terms if the company has strong bargaining power. Strong policies, documented correspondence, meeting minutes, performance reviews, and completed HR forms can clearly evidence the need for action, and the benefits of settlement as an alternative to unilateral procedures. Using your legal adviser as a continuous, trusted resource and using them early is the best way to stay in control, even when challenging matters arise.
- Timing is … Timing can also improve bargaining power. Understanding when employees accrue rights and when potential claims expire is a good first step, for example, an employee will always have weaker bargaining power before they accrue protection from unfair dismissal at two years of service. Settlement discussions can also take place after an internal procedure has commenced, clarifying the alternative to settlement, and demonstrating the company’s resolve to ensure change. … Key.
- Use Protection. Raising the option of settlement with an employee can create or worsen claim risks if approached poorly. The best way to approach an employee is usually through a confidential and inadmissible ‘Protected Conversation’. This conversation is only inadmissible, however, in unfair dismissal cases where there has been no improper behaviour. Legal advice and scripts for these conversations can be very useful, especially if multiple potential claims are present.
- Waive, Goodbye. The fundamental purpose of the settlement agreement is for the employee to waive their legal rights to bring disputed claims. They will usually facilitate the termination of an employee’s service, but this is not essential if the parties have maintained a positive relationship, save for the disputed claims. The termination date, and what will happen between signature and termination (if separate), can be agreed quite flexibly.
- Value Added. Various additional terms can be agreed within a settlement agreement, increasing their value. Obligations of confidentiality, return of property, and restrictive covenants can be reinforced and new terms prohibiting disparaging statements and curtailing internal complaints can be introduced. Employees can also benefit from agreed reference and announcement wording.
- Entitlements and the Bottom Line. Valuing a reasonable settlement offer will depend largely on bargaining power and available resources. It is possible to agree a settlement without any payment, however, outside of unique situations, an employee will usually expect at least their statutory entitlements such as notice pay, pay for untaken holiday, and statutory redundancy pay (if relevant). Unless these statutory rights are in jeopardy, an employee will likely need a further incentive to agree to their termination and waiving their rights. Considering the time and cost of proceeding with plan B, and the merits and cost of potential claims, can be helpful when negotiating a fair settlement package. Shares, options, and other entitlements can also be wrapped up in a settlement agreement.
- Tax Efficiencies. Once the notice period and/or payment in lieu is resolved, the settlement agreement can take advantage of paying a tax-free ‘termination payment’ up to £30,000 to the employee, saving on NICs and income tax. Settlement payments can also be flexible and use other tax efficient strategies, such as agreeing payments into an employee’s pension subject to personal allowances, paying into other tax efficient vehicles, or attributing payments to pre-termination injury to feelings if relevant.
- Beware of the Solicitor. An employee will need to seek legal advice before signing a settlement agreement. Negotiations could progress very differently depending on who is engaged so it can be worth recommending a competent, independent solicitor. It is also standard practice for the company to contribute a reasonable amount towards the employee’s legal fees, likely at least £500 + VAT for standard agreements but potentially more for complex agreements.
- Resistance is… Fruitful. Expect negotiation and strategise accordingly. Employees often overestimate the value of their claims and, even if an agreement is reached in principle, advisers may still exploit weaknesses in the company’s position to augment the package once engaged. Making a clear, well-explained offer, below budget, from a position of strength can help keep negotiations realistic.
For advice on any of the topics discussed, contact the Employment team at Acuity Law.
