Settlements of Employment Disputes

How to Make a Settlement Binding

In a situation where you are attempting to resolve an employee dispute, possibly by offering a settlement to pay-off the employee, an employee cannot under normal circumstances sign away his statutory rights to compensation for loss of employment-any attempt to make him do so will be invalid (an employee can however waive any contractual rights in writing).

However, a compromise agreement to settle a statutory claim can generally be made binding on the employee if it is in writing; it relates to a particular complaint; and the employee has received independent legal advice from a lawyer or relevant independent adviser (as defined in the legislation). The agreement must also state that applicable legislation has been complied with in reaching the settlement.

Where a lawyer, or a Citizens Advice Bureau or Law Centre adviser is named in the Employment Tribunal Application form as the employee's representative or if he states he has the authority to reach a settlement on the employee's behalf, then, unless you know otherwise, you can treat a settlement there by arrived at as binding.

It is possible to offer to settle a case in this way on a 'without prejudice' basis but reserving the right to show the letter to the employment tribunal when costs are considered.

It may help with costs if the employee is awarded compensation which is less than your earlier offer.

In wrongful dismissal cases, which go through ordinary Courts there is a well-established system for making a payment into Court.

Treatment of Ex Gratia Payments

Ex gratia payments will normally be taken into account by the employment tribunal in deciding an award, but when making such an offer you should specifically state that the offer is in settlement of both the basic award as well as the compensatory award for unfair dismissal.

Tax Treatment of Compensation

The first £30,000 of ex-gratia payment of compensation for termination (some times referred to as a golden handshake) is payable free of income tax. Thereafter tax is payable at the recipient's marginal rate. Where pay is given in lieu of notice, this is normally payable free of tax and National Insurance Contributions (unless there is express provision in the the employment contract for the employer to pay the employee in lieu of notice), however, sums such as accrued holiday pay, commissions and bonuses are taxable.