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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»Wil­lans LLP sponsors the Fam­ily Busi­ness of the Year cat­e­gory at the Glouces­ter­shire Live Busi­ness Awards

» Con­tact Jenny Hawrot at jenny. [email protected] 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.

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