What is a settlement agreement?
A settlement agreement is a legally binding agreement between employer and employee that settles any claims that the employee may have against their employer.
A settlement agreement is most often used in connection with terminating employment, but it isn’t always.
A settlement agreement could also be used where the employment is still ongoing, but both parties want to settle a dispute that has arisen between them.
It allows the parties to move on with a clean break.
When could a settlement agreement be used?
A situation in which an employer or employee might consider using a settlement agreement could be where an employee is not performing well and neither wishes to go through a lengthy capability process, in such cases the parties can bring the employment to a quick end on agreed terms.
Alternatively, an employee could have a legitimate complaint about an act of discrimination or harassment, but nonetheless both parties want to continue the employment relationship. In such circumstances the employer could provide for the employee to be compensated for their hurt feelings about the discriminatory act and the employee will waive their right to pursue the claim, allowing both parties to move on from the incident feeling that the matter has been adequately resolved.
How is a settlement agreement drawn up?
The basic terms of the settlement agreement will be agreed between the employer and employee. Those terms will then be set out in the written settlement agreement, which will identify the claims which the employee agrees not to pursue in exchange for the agreed payment and other matters such as mutual confidentiality and non-disparagement.
Any settlement agreement should be drafted professionally and customised for the specific employee and the individual circumstances. They must include a clearly expressed waiver of the specific claims which the employee has or could possibly have.
The settlement payments
A settlement agreement should contain a clear breakdown of the payments which have been agreed and should also state whether they are to be paid to the employee tax free or subject to tax and national insurance.
Payments of up to £30,000 compensation can often be paid without tax being deducted. However, the taxation of termination payments is a complex area and it’s advisable to take professional advice before agreeing the tax treatment of termination payments.
How much should be paid in a settlement agreement?
The amount of any settlement payment depends upon the individual circumstances of each case. Factors to be considered can include:
- the employee’s length of service;
- the circumstances which have led up to the decision to offer a settlement agreement;
- how long it would take to settle a dispute if agreement was not reached;
- the disruption to he business if settlement cannot be quickly and easily reached;
- the potential liability and cost of having to defend a claim in an Employment Tribunal.
What non-financial aspects should also be included in a settlement agreement?
It is often the case that confidentiality, mutual non disparagement and an agreed reference will be part of the settlement agreement, with a clause included stating that the employer, when providing a reference for the employee, shall not give any reference, whether oral or in writing, which is less favourable than the wording which has been agreed. Often these aspects are just as important to both parties as the financial payment.
How do I make sure a settlement agreement is legally binding?
It is crucial that, in order for the settlement agreement to be valid and binding, it will meet a number of statutory requirements, including that it must be written and must specify the particular complaints which the agreement is now settling.
Importantly, the employee must have received advice on the terms and effect of the agreement from an independent solicitor (or another adviser specified in the Employment Rights Act 1996, such as a properly certified trade union official). That adviser must be clearly identified in the written agreement and their advice must be covered by professional insurance.
If the settlement agreement does not meet all of the statutory requirements, then it will not be a valid settlement leaving it open for the employee still to bring claims against the employer. It’s therefore vital that significant care is taken when drafting the agreement and that it done professionally.
It’s also very important that any discussions between the parties about the proposed agreement also meet certain legal requirements, as otherwise, if the agreement does not end up being entered into, those discussions could end up being used as evidence in any legal proceedings which follow.
Settlement agreements can be a very useful way of resolving employment disputes. If conducted professionally and sympathetically the relationship can be preserved, costs can be significantly reduced and both the business and the employee can move on with minimal disruption and distress.
Avoiding cost, management time and potential reputational damage makes a settlement agreement a logical solution to a workplace dispute.
However, the law relating to many issues which arise in the context of settlement agreements is complex and it’s always a good idea to take proper, specialist professional advice before you begin to go along the settlement agreement route.
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