Settlement Agreements (previously known as Compromise Agreements) are an invaluable commercial tool allowing both employer and employee to separate amicably and quickly. They can be used either on an individual basis, or as part of a group change programme, such as a site closure, and if introduced constructively, can put to bed any stress or anxiety normally experienced in such situations by both parties and allow each to move on quickly and painlessly.
Avoid these 5 most common mistakes:-
1. The PILON Tax Trap
The first £30,000 of a redundancy payment is tax free. It used to be the case that if the contract of employment did not have a pay in lieu of notice (PILON) clause, then any PILON payments could also be added to the redundancy payment and paid tax free up to the £30,000 limit.
The law on this has now changed so that all PILON payments, regardless of what the contract of employment says, are now taxable and are not ex-gratia payments. Don’t get into a position where you have promised to pay an employee an amount tax free and end up having to gross up the payment to get the deal over the line.
2. Mean what you say
Failing to correctly represent the terms of the severance package to the employee when outlining the deal, for example by saying “we are offering you a package which includes your notice plus an ex-gratia payment of £30k”. If it then transpires that the agreement is £30k including notice, and the notice period is now taxable, this damages trust in the relationship and could jeopardise the negotiations unless you increase the amount on the table.
3. Not all claims are created equal!
Thinking you can cut corners, particularly in a collective situation, and use a settlement agreement to protect you, or get you out of a hole, could land you in a heap of trouble ! Settlement Agreements cannot compromise claims for failing to consult with appropriate representatives under TUPE 2006 or for the minimum 30 or 45 days on collective redundancies under the Trade Union and Labour Relations (Consolidation) Act 1992.
4. Giving a glowing reference
Agreeing to give a glowing reference but then back tracking on this and giving only a basic factual reference. This can cause a lot of upset to employees and become a big stumbling block as it could impact on future job prospects, at a time when emotions are already likely to be running high. Any reference must be honest and truthful so as not to mislead the recipients, so beware of making promises you cannot keep.
5. Using “without prejudice” when there’s no dispute
Introducing the possibility of a severance agreement is a delicate process. You need the conversation to be protected from being raised in any future proceedings, particularly if the employee is not expecting it, and construes it as tantamount to a dismissal. So when raising a deal, the conversation should be clearly expressed to be “without prejudice” or as a “protected conversation”. To be “without prejudice” there must be a genuine dispute between the parties. This means that there should be a current threat of legal proceedings. “Protected conversations” were introduced as a means to get around the need to have an existing dispute, whilst still being protected, but only protect against straight unfair dismissal claims, so are very limited.
So before offering a severance package consider all of the above points and if you are not a specialist, speak to me. If you are struggling to find an independent Employment Law Solicitor who is responsive, keeps within budget, and is able to undertake Settlement Agreement advice remotely to any location in the UK, or in the Midlands area meeting up in my VW Campervan, putting employees at ease – Contact Us !