Settlement Agreement: Case Studies

Mrs A

Mrs A approached us with a draft settlement agreement on the Friday which needed to be signed by the Tuesday. Under the terms of the agreement, Mrs A was being made redundant and was receiving approximately £5,500 in compensation. There was an underpayment of notice pay and no provision for salary for the month of termination, or accrued holiday pay and the contribution to legal fees was £250. The employer informed us that the £5,500 compensation included her salary for that month, her statutory redundancy payment and her notice pay and that on the advice of their accountant, this could be paid tax free to benefit Mrs A.

We were able to use our experience and expertise to amend the agreement to separate out and correct Mrs A’s entitlements to notice pay, her accrued salary and holiday pay (all of which were taxable as earnings) and the employer agreed to gross up the compensation to ensure that Mrs A was receiving the entitlements she had been led to believe, after tax. We were able to secure an increased contribution to legal fees to ensure that Mrs A had no personal liability for legal fees and swiftly sign off the agreement.

Mrs K

Mrs K instructed us to advise on her settlement agreement. Mrs K had been planning on leaving the company anyway and was offered the opportunity to leave under the terms of a settlement agreement. Mrs K understood that she would be placed on garden leave for a period of 6 months, with the opportunity to leave at any time during the garden leave period, and she would not be required to work, but her benefits would be withdrawn, and she would only receive 50% of her usual salary. Mrs K had found alternative employment and was on a 1 month notice period. Despite what the parties may have intended, the agreement required Mrs K to work for the company during the 6 month period leading up to the agreed termination date (she was not on garden leave), but in return for only 50% of her usual salary. There was no benefit to Mrs K signing the agreement – in fact, it was to her financial detriment. The contribution to legal fees excluded VAT and was payable to Mrs K directly, meaning it would not benefit from a tax exemption, saddling Mrs K with a bill for legal fees which exceeded the contribution being made by her employer due to the tax treatment of the contribution. Whether unintentional or not, the settlement agreement had the effect of varying Mrs K’s contract of employment and reducing her salary by 50%. Following our advice, Mrs K quite rightly made the decision not to sign the settlement agreement.

Mr P

Mr P instructed us to assist with drafting a formal grievance regarding his manager’s behaviour and discriminatory treatment he was being subjected to at work, which was making it impossible to do his job. Prior to lodging the finalised grievance, Mr P was presented with a settlement agreement to sign citing a ‘relationship breakdown’ and ‘loss of trust and confidence’ in his ability to perform his role. It was clear there was common ground between the parties for a mutual exit, albeit both parties had opposing views on the cause of the problem. We filed Mr P’s grievance and engaged in correspondence with the employer and were able to successfully negotiate improved terms for Mr P, including an increase in the compensation payment of more than 100% as well as an increase in the contribution to legal fees for advice on the settlement agreement.