Tips for SMEs on the use of a Settlement Agreement
We are often approached for advice by SME clients on how to use a Settlement Agreement to terminate an employment relationship.
For smaller employers, the complexities of employment law can be daunting. The amount of time and management effort involved in terminating an employee’s contract of employment can seem overwhelming, especially if there is little in-house HR support. A Settlement Agreement can offer a swift and more cost-effective way of bringing the employment relationship to a close in a mutually beneficial way.
A Settlement Agreement can be used in a dispute situation, in place of a redundancy, or in a dismissal situation, perhaps where there is an underperforming employee or a case of misconduct.
If used correctly, a Settlement Agreement offers certainty to both employer and employee and the chance for a clean break. It provides the employee with a compensatory payment for the loss of employment and ensures that no legal action will be taken against the employer by the employee.
What’s in a Settlement Agreement?
No two Settlement Agreements are the same but, as a general rule, they will cover such issues as:
- Payments due to the employee and whether any will be subject to tax. This includes the compensation payment, plus any outstanding bonuses or commission, as well as notice and holiday pay. In general, payments under the employee’s contract will be taxable whilst ex-gratia payments, up to £30,000, will be free from tax.
- A waiver of any employment claim. In other words, the employee agrees not to take any further legal action in respect of their termination of employment.
- A confidentiality/non-disclosure clause, in order to protect the reputation of the employer’s business
- Practical issues such as any handover arrangements, or return of company property
- The terms of any job reference
Tips for negotiating a settlement offer
As a starting point, the employer should seek early legal advice from an experienced employment lawyer. This will ensure the Agreement is legally compliant and help protect your business from any legal action and reputational damage.
When entering negotiations with the employee:
- Keep in mind how much it would cost to resolve the dispute/terminate the contract without a Settlement Agreement
- Be clear about the reasons for terminating the employment relationship
- Explain the benefit of using a Settlement Agreement and also the consequences of not using one
- Be sensitive to the employee’s issues and answer any queries
- Be clear that the aim is to reach a mutual agreement
- Allow sufficient time for the employee to consider the offer (at least 10 days)
- Allow the employee to be accompanied at any meetings
- Ensure the employee has received independent legal advice
- Be prepared – make sure you have thought everything through
Contact David Trood for further advice and support on Settlement Agreements, or any other employment law advice.
Email: dtrood@bird-lovibond.co.uk
Tel: 01895 256151