PENP and Settlement Agreements – getting it right for all parties

07 August 2019

Since April 2018, all Post-Employment Notice Pay (PENP) has been classed as earnings, whether it was provided for in the Contract of Employment or not, and therefore subject to tax and NI.

PENP is a common feature in Settlement Agreements which employers may wish to use as a way of “exiting” an employee from the business quickly without the risk of an Employment Tribunal claim. 

Following the removal of Employment Tribunal fees, unsurprisingly there has been a rise in the number of claims made by employees.

In addition, whilst robust employment law processes such as disciplinary and performance management procedures exist to enable employers to legally address problems with their employees, to the point of dismissal if necessary, these can be long-winded and time-consuming. Often, the employer will have the view that with the best will in the world, the employee is not going to change or improve and that dismissal is therefore inevitable.

In these circumstances, therefore, the employer may opt to enter into a Settlement Agreement with the employee.  This involves conducting pre-termination negotiations with the employee; and making a payment to him / her in return for an agreement to waive any Tribunal claims.

Settlement Agreements with the Employee

It is important that the negotiations are carried out as “protected conversations” in order for the fact that they have taken place to be inadmissible in any unfair dismissal proceedings, should agreement not be reached.

The protection of inadmissibility may also be lost if there is improper behaviour on the part of the employer e.g. threatening to dismiss the employee if agreement is not reached, failing to allow the employee to be accompanied during pre-termination negotiations, or placing the employee under undue pressure by not allowing sufficient time for consideration of the offer.

In addition, the Settlement Agreement must be well drafted in order to ensure the waiving of all current and future claims.  To be legally enforceable, the employee must seek independent legal advice and the Agreement must be counter-signed by that advisor.

As well as PENP, the Settlement Agreement must offer a Compensatory Payment; this can be paid tax-free (up to £30,000) but care must be taken that the amount of the payment is not obviously related to salary and length of service in order to avoid it also being deemed to be PENP.

Find out more 

MHA MacIntyre Hudson HR Solutions can advise employers on how to conduct a “protected conversation” to good effect. We can also draft the Settlement Agreement and handle all negotiations with the employee’s legal advisor on the employer’s behalf.

To contact the HR Solutions team to find out how they can help with the employees of your business, please email: