Thoughts on Settlement Agreements
This can be a tough subject, often cloaked in subjectivity, mysticism and conjecture. The fact is that sometimes it is the best way forward for both you as an employer and for the employee. One thing is for sure though, you will need advice on how to proceed with and action such an agreement.
Here are some thoughts from the employer perspective…
If I look to settle, what’s a reasonable amount?
A guide, often used to determine the value of an average settlement payout is two to three months gross salary paid in addition to the employees notice pay, plus untaken holiday etc.
Can a member of staff ask for a settlement?
Yes, they can! Whilst generally the employer is the first to offer, employees can ask or use a qualified advisor.
Can I / they negotiate? Yes, this of course is on an individual case by case basis.
What do I need to consider from a legal requirements perspective?
The agreement, must be:
- In writing.
- It must detail / cover the specific dispute you are having.
- It must be made by a lawyer who is independent of your employer.
- The lawyer must be named on the agreement.
- The agreement is checked by the lawyer to make sure it sets out what you and your employee have agreed to do.
- The lawyer checks and states that the agreement meets the criteria (rules) about settlement agreements.
Who pays for the solicitor? As the employer, you do. There is normally a figure you will agree to pay for the completion and action of the document. This is often set at around £500 for reference.
What cannot be settled with a settlement agreement?
Issues relating to redundancies or TUPE transfers and claims that are for statutory matters such as maternity, paternity or adoption pay cannot be settled this way.
Does the employee get any tax breaks on this type of agreement?
Usually, they are treated in the same way as the employees’ weekly /monthly pay. They are classed as what you would be paid normally so are taxed in the normal way.
What about Ex-gratia payments?
An ex-gratia payment is an amount of money a departing employee would receive as a termination payment when they leave employment. It is more than what they would have been entitled to be paid under their contract of employment. It usually represents a “good will” sum paid by the employer at their discretion, without any obligation to do so.
An ex-gratia payment is often much more tax efficient (depending on the size of the settlement) as the first £30k of any sum can be paid without deductions for tax and NI.
Things to think about
It could be easy to think that settlement agreements offer a quick fix for issues of performance or ill-fitting employees.
Good old performance management, in fact just regular management of employees, where they know what they are doing (objectives) and why they are doing it (strategy or plan) coupled with some regular feedback can remedy ‘situations’ and make for a better workplace.
Sometimes you may inherit a situation and the only palatable way to sort it out seems to be through a settlement agreement. If for example, the employee has long service and refuses to change, you try to manage them, and they resist and start to cause collateral damage. Then this may feel like a candidate for an agreement.
How hard did you try to sort it out though? Ask yourself that question.
I would stress again, that these situations can often be rescued with good, hands-on management and communication.
So, look at your own and your managers and supervisors’ style, behaviour and attitude to managing their team members.
Have they got the right skills and been exposed to the relevant experiences?
If you have questions or want help with developing day to day management skills, please drop me a line.
Written By: Mark Rollé, Managing Director, Beyond Benchmark Consultancy Ltd
https://www.beyondbenchmarkconsultancy.co.uk/
