Settlement Agreements Q&A
We answer the commonly asked questions regarding Settlement Agreements. If you would like to speak with an Employment Law specialist, take advantage of our FREE initial consultation and speak to a member of our team today and find out how we can assist you.
Q: What is a Settlement Agreement?
A: 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 between the parties when doing so. In most cases this involves the employer making a settlement payment to the employee in exchange for the employee 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.
Q: Why do employers want their employees to enter into Settlement Agreements?
A: 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 later. 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, employers will often 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 agreement will need to be enough to compensate the employee for not taking these claims further.
A good employment solicitor will be able to quickly understand any potential claims the employee has and advise their client (be it the employer or employee) on whether any offer being made is fair.
Q: Are there any formalities that have to be complied with for a settlement agreement to effectively waive any employment rights?
A: 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 may 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 employee’s legal fees for seeking this advice. This contribution is typically between £350 and £500 plus VAT, but it may be possible to agree more if appropriate (such as for senior employees or those with more complex termination arrangements).
It should be noted that although conventional practice is for employers to pay a contribution, payment of legal fees by the employer is not legally required for a valid settlement agreement. In circumstances where an employee has proposed a settlement agreement themselves to avoid a dismissal being on their record, the employer may be less inclined to make a contribution for the employee to seek legal advice.
Q: What are the main terms usually covered in a settlement agreement?
A: These agreements are typically about 20 pages in length and are full of legal terms that may be fairly unfamiliar to those without legal experience. A good employment solicitor will understand the pitfalls and implications of each of these clauses and will advise their client (either the employer or employee) of the most appropriate wording in each specific situation.
A typical agreement will cover the following areas:
- · An agreed ‘Termination Date’
- · Details of any payments/contractual benefits to be made to the employee up until the Termination Date
- · Notice pay and accrued (but untaken) holiday pay and working arrangements up until the Termination Date
- · A Termination/Settlement payment (also commonly referred to as ex-gratia or compensation payment)
- · Expectations regarding use of confidential information
- · Post termination restrictions/restrictive covenants
- · ‘Secrecy’ and ‘non-bad-mouthing’ provisions
- · Legal costs and adviser’s certificate
- · Tax
- · References and announcements to colleagues/clients
- · Waiver and settlement of employment claims
- · Implications if contract breached (including bringing claims after signing)
- · Warranties from the employee
- · Practical matters such as return of company property
Q: Can the terms of these agreements be negotiated?
A: Although above are the typical terms that will be covered in a settlement agreement, there are many other terms that can be included depending upon the circumstances. The detail often hidden in these agreements is why it is important to seek specialist 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, including any negotiations that may be necessary.
For employers this includes negotiating and drafting settlement agreements as appropriate for their employees and advising the employer on the best use of these.
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. Advice can be given to employees remotely using video call facilities, or face to face where more appropriate.
