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Employment Law: Settlement Agreements Q&A (Part 3)

View profile for Sally Morris
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Q: Are Settlement Agreements confidential?

One of the significant advantages of using a Settlement Agreement is that is allows an employment dispute, or a potential dispute, to be concluded relatively quickly and privately. It is normally in both parties’ interests for the terms of the Settlement Agreement to remain confidential, and an express term to that effect is often included. Typically, the Settlement Agreement will only permit the employee to disclose the terms in limited situations, such as to immediate family members and professional advisers.

If the obligation to keep the Settlement Agreement confidential applies to both parties, of question of whether the employee should receive any compensation should not arise. However, if the obligation is one-way, such that only the employee is bound by some confidentiality restrictions, it is advisable from an employee’s perspective allocate specific consideration to the confidentiality obligation.

Q: Are termination payments tax free?

A payment made to an employee on termination may comprise several different elements, some taxable in their entirety, some taxable only to the extent that when aggregated with other payments exceed £30,000. By way of summary, below are the most common items:

Payments taxable in full whether paid before or after termination include salary payments, contractual bonus or commission payments, garden leave payments, consideration for restrictive covenants and contractual payments in lieu of notice.

Payments which are tax free for the first £30,000 include damages for breach of contract, compensation for discrimination, non-contractual benefits in kind provided on or after termination, statutory redundancy payments and unfair dismissal compensation.

Q: What is the effect of a breach of a Settlement Agreement by the employee?

Where a former employee has breached a Settlement Agreement, the former employer may deal with this by raising a claim for breach of contract in the civil courts or by making an application for an injunction where the breach relates to the employee’s post-termination conduct, such as confidentiality or restrictive covenant obligations.

Q: What is the effect of a breach of a Settlement Agreement by the employer?

Where the employer breaches a term of the Settlement Agreement, for example by failing to pay the termination payment, the employee’s remedy depends on whether the terms binding the employee are conditional on payment of the termination payment.

The employee could enforce the Settlement Agreement by raising a claim for breach of contract in the civil courts or bringing a contract claim in an Employment Tribunal provided the Settlement Agreement is made before termination.