Agreeing a Settlement Agreement Whilst Continuing to Work for the Employer

Difficulties in the workplace are bound to arise. It’s not necessarily anyone’s fault, but they can be problematic both for employers and employees, leading to

• stress
• low morale and
• lack of productivity.

The difficulties can often be resolved through a grievance procedure or good management. The employee can then continue to work for the employer. However, a sensible employer may still want the employee to agree to a settlement agreement even though the employment is continuing. In this article, we explain why.

Using a Settlement Agreement when the Employment is Ongoing

Usually, a settlement agreement is used when employment terminates, but this doesn’t have to be the case.

Sometimes, an employee can agree to a settlement agreement and continue working. Settlement agreements can resolve almost any workplace dispute, regardless of whether or not the employment is continuing.

The types of disputes that you may experience while the employment is ongoing may be:

• you have been the victim of harassment in the workplace
• your employer has been discriminating against you by not allowing you the same opportunities as your colleagues
• there has been a disagreement about how your commission or bonus should be calculated.

Any of these situations could give rise to a claim against your employer. Even after the cause of the dispute is dealt with, you may still be able to claim compensation. For example:

• your employer may dismiss the perpetrator of harassment, but you would still be entitled to claim compensation for the injury to feelings
• the discrimination stops, but you may be entitled to compensation for lost earnings that resulted from the historic discrimination
• you reach a compromise on how much commission or bonus you should be paid

In each of the above examples, a prudent employer will want to make sure that any settlement reached is clearly recorded and they you waive your right to bring any kind of claim. This is best done by way of a settlement agreement.

The tax situation is different

Many of the tax advantages of entering into a settlement agreement only apply if the employment is ending.

Most payments that are made whilst the employment is ongoing, whether expressed as compensation or otherwise, are likely to be fully taxable. This is because they will be deemed to be part of the employee’s remuneration. These payments include:

• lost earnings
• contribution towards the legal costs of getting advice on the settlement agreement.

However, compensation for discrimination should be tax-free. Discrimination includes less favourable treatment on the grounds of:

• Age
• Disability
• Gender reassignment
• Marriage and civil partnership
• Pregnancy and maternity
• Race
• Religion or belief
• Sex and sexual orientation

Damages for injury to feelings arising out of the discrimination can usually be paid tax free.

Similarly, damages relating to a personal injury in the workplace can also be paid tax free.