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Dealing with difficult staff - settlement agreements and protected conversations

11.05.2016

Settlement agreements are a useful way of managing the exit of a difficult employee, but getting the detail right is important.

Where there is no existing dispute, the employer can choose to have a ‘protected conversation’ with the employee first. This can set out your concerns (e.g their poor performance) and explain that you hope to agree an amicable exit from the organisation, without having to go through a formal process.

As long as the employer does not engage in “improper behaviour” a protected conversation will be off the record, so the employee cannot rely on the conversation as evidence in an Employment Tribunal on cases of unfair dismissal.

So how do you approach a protected conversation?

It is a legal requirement that the employee is able to obtain independent legal advice on the terms of a settlement agreement. The employers will be expected to make a reasonable contribution towards an employee’s legal fees.

A benefit to using the settlement agreement route to manage the exit of an employee is that you can usually take advantage of the tax exemption which allows for a proportion of the termination payment to be paid tax and NI free. Employers can currently make a payment to the employee of up to £30,000 tax free if it is a genuine compensation payment for loss of employment. This includes redundancy payments.

Generally, no national insurance contributions are currently payable on genuine termination payments either below or above the £30,000 cap.

Amanda Finn, partner at Gullands comments: “The most notable change as announced in the 2016 budget, is from April 2018 employer National Insurance contributions will be payable on the element of any termination payments which exceeds £30,000. The £30,000 exemption threshold from income tax will continue to apply and the entire termination payment will be exempt from employee National Insurance contributions.”

Amanda Finn can be reached at [email protected]

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