Employment – settlement agreements (part one)

In the first of two parts looking at settlement agreements, the National Golf Clubs’ Advisory Association looks at what they are and why they might benefit a golf club, how to start a negotiation for one and what their tax implications are.

A settlement agreement is a document which, if it meets certain legal requirements, allows an employee to waive their rights to bring certain claims to the Employment Tribunal in return for consideration, usually a financial payment, from their employer.

A club may want to use a settlement agreement to avoid expensive and time-consuming disputes and Employment Tribunal claims concerning actions or failings of the club in respect of an employee’s employment or termination of employment.

Settlement agreements must be drafted in a prescribed way and the employee must take specified legal advice on the terms of the agreement for it to be valid.

Starting negotiations

If considering offering a settlement agreement to an employee it is essential to seek advice before entering into discussions with the employee. A club should be cautious about initiating conversations with employees about a possible parting of the ways before a dispute / issue has arisen because of the risk that the employee may treat the approach as a breach of contract. For example, if the club suggested the employee is likely to be dismissed if they do not leave on agreed terms, this may be a breach of the implied trust and confidence term (possibly giving rise to a constructive dismissal claim) or may even amount to discrimination or victimisation. Such conversations have to be very carefully managed and often involve a scripted conversation, during which the club must avoid any suggestion that dismissal is inevitable if the parties fail to agree on a settlement.

It is important to note that all genuine discussions and communications regarding settlement of a dispute are considered ‘without prejudice’. This means that they cannot be used by the employee as evidence of admissions by the club in relevant legal proceedings should the settlement discussions fail. All relevant communications should therefore be labelled ‘without prejudice’ and ‘subject to contract’. This should also ensure that neither party is legally bound by anything ‘agreed’ in the negotiations until a final written agreement is actually signed.

There is also additional legal protection known as ‘pre-termination negotiations’, which may protect discussions around an agreed termination of employment from admissibility in a tribunal in an unfair dismissal claim unless there has been ‘improper behaviour’. In contrast to the without prejudice rule, there is no need for the parties to be in dispute in order for the rule to apply. However, there are limitations as to when this rule will apply so care still needs to be taken in opening up settlement conversations at an early stage.

With the above risks in mind, settlement agreements can be offered when employment is continuing, but in most situations, they will not be appropriate unless employment has terminated or is about to terminate. Given the complexities, it is important to take advice from the NGCAA early in the process.

Tax implications

The tax treatment of the payment made under the settlement agreements depends on a number of factors including:

· What types of payments are comprised in the settlement payment, for example, the payment might include notice pay (see below), amounts for compensation for unfair dismissal / discrimination, a statutory redundancy payment, damages for wrongful dismissal, an ex-gratia payment; and

· The timing of the settlement payment (for example, where a settlement agreement is signed a fair period in advance of the termination date, this can affect the tax treatment).

It is important that the club takes advice on the correct tax treatment of the termination payment(s). If it is not taxed and subjected to national insurance contributions (NICs) correctly, HMRC can recover unpaid tax and NICs, penalties and interest from the club as employer. Further, if tax and NICs have not been accounted for properly, penalties for late payment and for inaccurate returns may arise. It is essential therefore that the settlement agreement includes a specific tax indemnity that allocates the tax risk to the employee. As it may still be difficult for the club to seek to enforce the indemnity and recover payment from the employee, it is recommended that the tax treatment is carefully considered at the outset and, the club may even want to consider getting advance clearance from HMRC if in any doubt.

Clubs should note that as of April 6, 2018, a new regime applies to payments in lieu of notice paid on termination of employment. The intention is to tax (and subject to class 1 NICs) as earnings the basic pay an employee would have earned had the employee worked his or her notice in full. Therefore, a portion of a termination award equivalent to the basic pay the employee would have received had the employee served his or her notice in full is, broadly, treated as earnings and taxable. This is referred to as post-employment notice pay (PENP).

In the second part next month the NGCAA will look at the contents of settlement agreements. If the club wishes to offer an employee a settlement agreement, please contact Alistair Smith at the NGCAA on 01886812943 or office@ngcaa.co.uk.