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Do employers have to pay legal fees for settlement agreements?

As an employer, settlement agreements are often a useful tool to avoid a ‘messy’ end to an employment relationship. They serve as a way for an employer and an employee to end their relationship on mutually agreed terms. While this will involve a payment to the employee, as suggested by the name, it’s important to consider whether settlement agreements can come with any additional costs. Below, we discuss whether it is a requirement that employers pay legal fees for settlement agreements.

What employers need to know about settlement agreements

Settlement agreements, previously known as compromise agreements, are documents intended to bring an end to employment tribunal claims or another kind of court proceeding. Contained in the settlement agreement are a range of terms and conditions that are decided upon by the parties involved (typically an employee and their employer). Both parties must agree to the terms of the settlement agreement and the basis for ending the employment outlined therein.

Note that employees should be given at least 10 days to consider the contents of the settlement agreement provide a response. Employers must consider this timeframe, along with who needs to be involved and the best process in the event of further discussion. You should also be prepared to answer any questions the employee may have regarding the reasons for the offer and any of the terms it includes. It’s possible the employee will come back with a counteroffer, with negotiations continuing for a number of weeks.

Costs to employers in settlement agreements

There is no legal requirement that states an employer must pay for the legal fees that come with a settlement agreement. However, it is also the case that employees must receive independent legal advice on the terms and conditions of the agreement before it is signed. As such, it is common practice for employers to fund all or most of the legal costs, as the agreement cannot take effect without it. The exact amount that an employer should pay towards legal fees will depend on the nature of the issue being resolved. It should be noted that the agreement should contain details of any payments, including how they will be made and when. It’s considered good practice to mention legal fees here, to help avoid confusion or renegotiation.

For more information, read ‘Can an employee request a settlement agreement?’.

However, employers might be able to obtain a tax exemption for the legal costs associated with the settlement agreement, although only in the presence of certain conditions. Here, ‘legal costs’ are defined as any fee paid to a lawyer or for the procuring of legal services. Tax in relation to settlement agreements is a complex area, so employers can benefit from seeking professional advice.

Do I need to pay my employee’s notice?

Yes. If they are working during their notice period any pay accumulated will have tax and National Insurance applied as normal. If a payment in lieu of notice (PLION) clause is included in the employment contract, this will also result in the notice being subject to tax and NI. However, if there is no PILON clause, employers have the option of making the payment as a gross sum. This could result in the payment being tax-free.

Expert legal support for settlement agreements

Although settlement agreements are intended as a way to save employers and employees time, that doesn’t mean they should be rushed. The team at Employment Law Services Ltd (ELS) are highly experienced in drawing up agreements which serve the interests of both parties. Alongside our extensive range of services for employers, we also offer specialist advice for employees regarding settlement agreements. Get in touch today and a member of our team will be happy to discuss your situation in confidence.