Much of the news at present centres around the economic impact of the coronavirus pandemic, with many employers considering redundancies as a result. During this period it is likely that there will be a surge in settlement agreements being offered by employers to their employees, but what exactly are they?
What is a Settlement Agreement?
A settlement agreement is a legally binding document that enables an employer and an employee to legally agree to terminate the employment relationship, and to help clarify the arrangements for doing so. In most cases this involves the employer making a settlement payment to the employee in exchange for them waiving all of their employment rights.
Entering into a settlement agreement will have the effect of settling any potential claims that have arisen, either during the employment relationship or from the handling of the termination process itself. Once both parties have signed a settlement agreement, and complied with all the legal formalities, it makes it extremely difficult for an employee to pursue the employer in either an employment tribunal or court.
Why do employers want their employees to enter into Settlement Agreements?
Settlement agreements can be used for many purposes, from settling a dispute that has arisen between the parties through to a relatively straight forward redundancy situation. This can help the employer achieve certainty by preventing the employee from taking them to an employment tribunal at a later date. Settlement agreements can also represent a quick and convenient method of terminating employment that can bypass the need to follow set procedures (redundancy, disciplinary, capability or grievance).
In redundancy situations, many employers will offer their employees enhanced settlement terms that are over and above the statutory minimum that they are legally bound to pay. In these situations, many employers will only offer these enhanced payments on the condition that the employee enters into a settlement agreement.
Whether to enter into a settlement agreement should always be a free choice for the employee, but the reality is that an employee may be risking any enhanced payment that is on offer should they choose not to accept. Whether such an offer is acceptable to the employee will often come down to the relative bargaining positions of the parties and any potential legal claims that they may have.
If there are potential claims that an employee could bring against their employer, the terms of the settlement will have to be sufficient to convince the employee to agree to a waiver of their employment rights.
A good employment solicitor will be able to understand any potential claims the employee has and advise their client (be it the employer or employee) on what represents a good offer.
The legal formalities
In order for a settlement agreement to become a legally binding document, there are a few formalities that must be complied with, otherwise the agreement will be open to challenge at a later date.
The most important of these is that the employee must have received independent legal advice on the terms and effect of the agreement. Payment for this advice is usually catered for within the agreement itself and in the vast majority of cases the employer will agree to contribute towards the employees legal fees for seeking this advice. This contribution is typically around £500 plus VAT, but it may be possible to agree more if appropriate (such as for senior employees with more complex termination arrangements).
It should be noted that although conventional practice is for employers to pay a contribution (as it is usually they who wish the employee to enter into the agreement), payment of legal fees is not a requirement for a valid settlement agreement. In circumstances where an employee has proposed a settlement agreement themselves (which is permitted), the employer may be less inclined to contribute to the employee’s legal advice.
What is usually covered in a settlement agreement?
The main points usually included in a settlement agreement are included below with a brief explanation of each. A good employment solicitor will understand the pitfalls and implications of each of these clauses and will advise their client (employer or employee) of the most appropriate wording.
- An agreed termination date
- This will be the date the employment contract and employment relationship will officially end (once the agreement has been signed by all parties and the adviser)
- Payments up until the termination date and any contractual benefits
- The employee should be paid up until the termination date along with all their usual benefits. If there are any other contractual payments such as bonus payments that are being made, these should also be included in the agreement.
- Notice pay and accrued but untaken holiday pay
- The notice period will need to be adequately covered in the agreement, stating that the employee has either worked their notice (and therefore paid for it) or has been ‘paid in lieu’ for this (or part worked and part paid in lieu). Upon termination of employment an employee should also be paid for any accrued but untaken annual leave, as per the terms of their contract of employment. These payments should be subject to usual PAYE deductions.
- A Termination/Settlement payment (also commonly referred to as ex-gratia or compensation payments)
- Any tax free element (usually these payments are payable free of tax up to the first £30,000) is usually catered for in a separate part of the agreement. This should detail the amount being paid and whether it is inclusive of any statutory redundancy payment to which the employee is entitled. These payments will vary from employer to employer but are usually higher than any statutory payments (although not always) in order to incentivise the employee to sign.
- Expectations regarding use of confidential information
- All employees will come into contact with confidential information at work. This could be highly confidential information such as trade secrets or less confidential information such as client details, business plans and company finances. Obligations on the employee will usually exist in the employment contract, but will also be re-stated in the settlement agreement. These obligations will still apply even after the employment contract has ended.
- Post termination restrictions/restrictive covenants
As with confidential information above, an employee’s contract of employment may include clauses that are intended to protect the business following termination of employment. These contractual provisions will often be restated in the settlement agreement.
Post termination restrictions will apply for a set period of time after the termination date (typically 3 months to 1 year in duration) and will prevent the employee from doing certain things during that period such as not competing with the employer and not poaching or dealing with clients, prospects or employees. This is a relatively complex area and often a point of contention where the employee wishes to seek new employment, but the employer wishes to maintain their client list. This is often a key point for negotiation in settlement agreements, especially for those in more senior positions.
- ‘Secrecy’ and ‘non bad-mouthing’ provisions
Depending on how the employment relationship has ended, these clauses will become more or less important. An employer will usually want this provision included to prevent the employee from referring to any dispute (if applicable), saying anything derogatory about the company and also to prevent the employee from discussing the amount of compensation being offered.
In particular employers do not wish such payments to be discussed with other employees, as this may set a precedent in any future negotiations the employer has. Where the relationship has broken down, the employee may also be keen on ensuring the employer agrees to keeps matters confidential themselves and does not say anything that may harm the employee’s job search moving forwards.
- Legal costs and adviser’s certificate
- The employer will usually include a contribution to legal fees to enable the employee to take the required legal advice. In most cases, advice can be given within the fees provided by the employer, unless further negotiations regarding the terms are required. The employee will be given the settlement agreement and will then be encouraged to find a solicitor who is independent of their employer and can advise them. It is important for the employee that they seek a solicitor with experience in dealing with employment law matters and settlement agreements. Once the employee has been advised, the solicitor will be required to sign the adviser’s certificate at the back of the agreement.
- It is usual for a settlement agreement to state that any issues regarding the tax calculations in the agreement will ultimately rest with the employee. This makes it vital that the employee takes the agreement to a suitably experienced solicitor who will understand the likely potential tax implications of the payments being made. There may be some structural changes or additions to the wording that will provide the employee with additional protection.
As with the secrecy clause, details of the reference to be given by the old employer are often of particular importance to an employee. In some instances a neutral or good reference may be of more value than the settlement payment itself. Ideally the employee will wish to control the information that is given out by the old employer, ensuring that they do not discuss any disputes or grievances, or provide any negative information to prospective employers.
- Waiver and settlement of employment claims
This is the main benefit of the agreement for the employer, ensuring that a line is drawn under matters and that the employee is effectively waiving all and any claims they could bring before an employment tribunal or court. The adviser should be advising on the rights being waived, and the effect that this has on the employee’s ability to pursue a claim in an employment tribunal or court. The employee will also agree that they, and no-one on their behalf will issue proceedings against the employer.
- Implications if contract breached (including bringing claims after signing)
- The employer will also wish to introduce consequences for the employee should they materially breach the agreement or decide to bring a claim against the employer after signing. This will usually include a clause requiring repayment of the settlement amount and the ability for the employer to pursue the employee for their legal fees incurred in defending any claim.
- Warranties from the employee
- It is typical for the employer to want the employee to agree to a number of warranties as part of any settlement. These are essentially contractual promises that the employee is making and the agreement will be conditional upon these being true.
- These may include the employee confirming that they have not already secured alternative employment at the time of signing the agreement and confirmation that they have not committed any gross misconduct type offences that the employer is unaware of. The payments being made within the agreement will often be conditional upon these being true.
- Practical matters such as return of company property
- The employer will wish to ensure that any property such as keys, passes and computers are returned to them, along with copies of any confidential information or information held electronically. It may also be possible to the parties to agree to keep certain items and these should be recorded within the agreement where possible.
These are the usual terms included in a settlement agreement, but there are many other variations depending upon the circumstances. The above highlights the importance of seeking suitable legal advice when either putting together a settlement agreement (for an employer) or advising on the terms of an agreement (for an employee).
Ultimately the final document will be an agreement between the parties, and before any agreement can be reached, further negotiations may be required. At Parfitt Cresswell we can help both employers and employees with all aspects of settlement agreements.
For employers this includes drafting an appropriate settlement agreement, advising on when and where they may be best used and negotiating the final terms with the employee’s representative.
Employers who are carrying out larger scale redundancies will sometimes provide their employees, who may not know where to seek advice, with a list of suggested independent solicitors. In these cases, we would still be acting for the employee independently of the employer, but it may make sense for us to discuss certain matters with their employer directly prior to instruction.
For example, we may be able to offer an employer a lower rate for reviewing their settlement agreements for many staff, on the basis that we will be advising many in relation to the same terms and background. It is also sometimes advisable for us to review the employer’s template settlement agreement before advising their employees to ensure that any amendments that we would usually request are only made once, saving all parties time.
Where there are multiple redundancies, it may also be possible for us to visit the workplace (Covid19 restrictions permitting) to make this an easier process for both employees and the employer. Currently we are using technology such as zoom calls to enable quick and easy face to face advice and sign off of agreements, which is another easy alternative where face to face visits are not possible.
For employees who have been presented with a settlement agreement by their employer, we are usually able to advise on these within the contribution being offered by the employer. We are able to advise wherever the employee is based without the need for them to leave their home or office, offering advice by either telephone or video call. We are able to manage the whole process remotely from sign up to sign off, working to short deadlines where necessary.
If you or someone you know is experiencing legal issues or has a question regarding settlement agreements or employment law in general, be sure to take advantage of our complimentary initial consultation (via telephone or video call) now by contacting us today on 0800 999 4437 or emailing email@example.com to arrange your complimentary appointment with a friendly member of our team of legal experts. Places fill up quickly so be sure to reserve your spot now.
We look forward to helping you with your legal needs.