The latest results from the Ministry of Justice show that since the abolition of employment tribunal fees last summer, there has been a sharp rise in the number of employment tribunal claims, with the latest figures showing that single claims have almost doubled and multiple claims have increased by 467%.
With the increased threat of claims by disgruntled employees, many employers use settlement agreements when employment relationships turn sour. Settlement agreements are a useful means of resolving ongoing workplace disputes and/or facilitating an employee’s departure from the business – they certainly minimise the risk of legal action from the employee – but are settlement agreements being used effectively or excessively by employers?
A settlement agreement is a legally binding contract under which the employee waives the right to bring a claim against their employer in return for a financial payment. Settlement agreements are voluntary and usually reached through the process of negotiation. In most circumstances, the parties can speak freely in the negotiation without fear of anything said being used in evidence against them should the negotiations break down, but this is not always the case.
Now more than ever, employers should ensure that they are following a proper process when conducting settlement agreement negotiations. Understanding the circumstances in which settlement discussions can be admissible as evidence in employment tribunal cases can assist employers in avoiding the risk of this eventuality occurring.
The ultimate goal for both parties in settlement negotiations is to secure the best settlement package possible. Money is often a key driver, with the parties often assuming that payments made pursuant to a settlement agreement fall within the £30,000 tax exemption and can be paid tax free. This is not always correct.
Changes to the taxation regime earlier this year mean that some payments and benefits made in connection with the termination of an employee’s employment will be chargeable to income tax and national insurance contributions and will not benefit from the £30,000 threshold. It is therefore imperative that employers understand the correct tax treatment of each termination payment to avoid liability for tax further down the road and to manage employee’s expectations as to the amount of money they will actually receive when they leave.
Nicola Butterworth and James Mee, employment law and tax law experts from Howes Percival LLP will be discussing the legal and practical issues surrounding the use of settlement agreements including strategies for settlement negotiations and key changes to the tax treatment of termination payment in the forthcoming Norfolk Chamber of Commerce HR Forum which is taking place on Wednesday 20 June 2018 at Holiday Inn, Norwich. Click here to find out more and book your place.