FAQs
Settlement agreements
What is a settlement agreement?
A settlement agreement is an agreement entered into between an employee and an employer whereby the employee waives their rights to pursue certain employment claims in return for the employer usually offering a termination or compensation payment.
What are the legal requirements for settlement agreements?
The requirements are, as follows:
the agreement must be in writing
the agreement must relate to specific complaints
the agreement must state that the conditions regulating settlement agreements under the relevant statutory provisions have been satisfied
the employee must have received independent legal advice as to the terms and effect of the agreement and in particular its effect on their ability to pursue claims in the Employment Tribunal
at the time of giving the advice the independent legal adviser must have a policy of insurance or an indemnity covering the risk of a claim by the employee
Does the employer have to contribute to the employee’s legal costs?
There is no legal requirement for the employer to contribute but usually the employer will offer a contribution.
Are any restrictive covenants in the employment contract still binding?
It depends on the wording of the settlement agreement. Often the employer will include wording in the settlement agreement that the employee remains bound by the restrictive covenants in the employment contract, or the employer will repeat the restrictions in the agreement. Sometimes the employer may be willing to waive some of the covenants or, for instance, reduce their length but any waiver or change should be covered off in the agreement.
Do all termination payments qualify for the £30,000 exemption?
No. The exemption only applies if the payment is not otherwise chargeable to income tax. Generally, contractual payments, such as pay relating to notice will be subject to income tax and national insurance contributions. However, there are some exceptions. Redundancy payments, for instance, whether contractual or discretionary do attract the £30,000 exemption. Also, some payments, which may be non-contractual, such as for retirement or for confidentiality, do not qualify for the exemption. Payments made to employees due to their disability or injury are completely exempt subject to certain conditions.
Do all termination payments qualify for the £30,000 exemption?
No. The exemption only applies if the payment is not otherwise chargeable to income tax. Generally, contractual payments, such as pay relating to notice will be subject to income tax and national insurance contributions. However, there are some exceptions. Redundancy payments, for instance, whether contractual or discretionary do attract the £30,000 exemption. Also, some payments, which may be non-contractual, such as for retirement or for confidentiality, do not qualify for the exemption. Payments made to employees due to their disability or injury are completely exempt subject to certain conditions.
Is the employer obliged to provide a reference?
Generally, the employer is only obliged to provide a reference when there is a provision in the settlement agreement requiring them to do so, though the employer may have a legal obligation to provide a regulated reference in any event.
Often the employer will agree to provide a standard factual reference, which would usually be annexed to the agreement, as well as refer to its obligations for any regulated reference requests.
Redundancy
What is the legal definition of redundancy?
Redundancy occurs when an employee is dismissed due to any one of the following:
the closure of the business
the closure of the place where the employee was employed
reduced requirements of the business for employees to do work of a particular kind
Who is entitled to a statutory redundancy payment?
Generally, employees who have at least two years’ continuous service with their employer are entitled to a statutory redundancy payment.
An employee will lose their entitlement to a statutory redundancy payment if they unreasonably refuse an offer of suitable alternative employment.
How is the statutory redundancy payment calculated?
For each full year of service at the age ranges below, the employee receives:
up to age 22 – half a week’s pay
age 22 to 40 – one week’s pay
age 41 and over – one and a half week’s pay
There is a maximum weekly cap of £571, even if the employee earns a greater amount.
Also, employees can only receive statutory redundancy for a maximum of 20 years’ service and the maximum statutory redundancy payment is therefore £17,130.
To dismiss fairly, what are the key procedures that the employer should be following?
the employer should consult with the employee prior to a decision being taken
if appropriate, the employer should carry out a fair selection process
the employer should search for suitable alternative roles
depending on the number of proposed redundancies carry out collective consultation
Although, generally, employees need at least two years’ continuous service to bring an unfair dismissal claim, employees could bring other claims such as for discrimination. It is therefore sensible to follow a fair process, regardless of the employee’s length of service.
What is the maximum compensatory award for unfair dismissal?
The maximum compensatory award is normally the lower of 52 weeks’ pay or £93,878.
When does the duty to consult collectively apply?
The duty applies when the employer is proposing to dismiss as redundant 20 or more employees from one establishment within a 90-day period.
How long should collective consultation last?
Where 20 to 99 redundancies are being proposed there must be a minimum consultation period of 30 days before dismissal and where 100 or more redundancies are being proposed there must be a minimum consultation period of 45 days before dismissal.
What is the maximum award for breaching collective consultation obligations?
90 days’ gross pay for each dismissed employee.
Notice
How is notice determined?
Usually, the notice that the employer and employee must provide is agreed between the parties, as set out in the employment contract. The notice period may be the same for the employer and employee but not necessarily.
What is reasonable notice?
If there is no provision for notice, reasonable notice must be given. Reasonable notice would be determined by taking factors into account such as the seniority and salary of the employee and the market norm.
What is statutory notice?
Statutory notice is the minimum notice that must be given irrespective of what is stated in the employment contract. If the notice period in the contract is longer than the statutory notice, then the contractual notice will apply.
The statutory minimum notice that the employer must provide is:
one week’s notice if the employee has been employed for one month but less than two years
one week’s notice for each continuous year of service if the employee has been employed for more than two years but less than twelve years
twelve weeks’ notice if the employee has been employed for more than twelve years
The employee must provide the employer with one week’s minimum notice if they have been employed for one month or more.
Can the employer and employee agree to waive statutory notice?
Yes, the parties can agree to waive or shorten statutory notice.
When is an employer able to dismiss without notice?
Usually, the employment contract will specify circumstances when an employer is able to summarily dismiss an employee. Examples could include gross misconduct, gross negligence, a material or repeated breach of obligations to the employer, conviction of an arrestable offence or, for instance, ceasing to be eligible to work in the UK.
Minimum statutory notice is still required unless the employee is guilty of misconduct.
Employers must also be aware of their general legal obligations, such as relating to unfair dismissal law.
Do employers and employees need to give notice to end a fixed-term contract?
No, fixed-term employment contracts normally end at the end of the term and the parties are not required to provide notice.
However, some fixed-term contracts allow the parties to give notice to end the contract earlier.
Also, it is important to note that the non-renewal of a fixed-term contract amounts to a dismissal. To defend an unfair dismissal claim, an employer would need to have a fair reason not to renew as well as follow a fair procedure.
