Finding the right agreement for a parting of the ways

When you need a clean break from an employee, a settlement agreement can be a neat solution. JENNY HAWROT, associate solicitor at Willans LLP, explains more

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» Contact Jenny Hawrot at jenny. hawrot@ willans. co.uk for advice on settlement agreements

» When should I use a settlement agreement?

Settlement agreements are frequently used where there is a dispute with the employee (such as poor performance, misconduct dismissal or a clash of personalities) and the parties wish to end the employment relationship.

They can also be used where the employer is paying an enhanced redundancy payment and wishes to obtain some security in return.

» Do employees have to be advised by a solicitor and will I need to pay for their advice?

The employee must receive advice on the terms of the agreement from an independent solicitor and the effect signing it will have on their employment rights.

Without this advice, the agreement will not be enforceable or legally binding – the employee will still be able to issue proceedings against you.

There’s no legal duty to contribute towards an employee’s legal fees, but it is accepted practice.

You will only have to pay the contribution towards legal fees if the employee signs the agreement.

» What about the compensation – how much should I pay? Will I have to pay tax on it?

There is no formula for establishing the amount of compensation.

It will depend on each individual case, the circumstances of the termination and the employee’s potential claims waived by the agreement.

All remuneration – including salary, notice pay (including payments in lieu of notice and post-employment notice pay), contractual benefits and annual leave – should be taxed in the usual way. Employers can pay a leaving employee compensation for loss of employment up to £30,000 free of Income Tax and National Insurance.

HMRC always has the last word, so a well-drafted agreement will usually state that if they decide tax is payable, the employee must indemnify you for the tax. » Are there any claims that are not waived by a settlement agreement? Employees will be able to bring a claim against you in the following, circumstances:

» Where the employer breaches any term of the agreement (eg if you do not pay the sums agreed).

» For personal injury the employee is not aware of or could not reasonably be aware of at the date of signing the agreement.

» In relation to their accrued pension rights. » Can I include a gagging clause?

A well-drafted settlement agreement should contain a comprehensive confidentiality clause covering the existence, content and circumstances leading up to the termination of employment.

If the employee breaches this clause, you can sue them for breach of contract and recover the compensation payment in addition to any losses suffered as a result of the breach.

In cases where an employment relationship has already completely broken down, there will be a concern about the employee’s conduct.

We would advise the settlement agreement includes a carefully drafted non-derogatory statements clause.

Breach of this clause would amount to a breach of contract.

It is generally not possible to prevent an employee from making disclosures about wrong doing in your organisation or conduct such as discrimination, harassment or sexual abuse.

» Do I have to provide a reference? Legally, no but an agreed reference is commonplace in settlement agreements. Any reference that is provided must be true, accurate and fair.

If it is not, you may be liable for negligent misstatement. Many employers often make it their policy only to give out basic information about job title and dates of employment.