What is a Settlement Agreement?
A Settlement Agreement is a legally binding agreement between an employee and an employer setting out the terms that have been agreed to resolve an employment dispute or potential dispute. Usually the employee’s employment will be terminated under the agreement, although sometimes an employee will continue to be employed.
Under a settlement agreement the employer agrees to pay the employee a severance or termination payment in exchange for the employee agreeing to waive the right for all time to pursue any employment claims in the Employment Tribunal. In this way it provides a clean break for both the employer and the employee and has the benefit of usually preserving the relationship between the parties and avoiding litigation.
Additionally, a settlement agreement will usually provide for the employee and the employer to keep the terms and circumstances of the settlement agreement confidential and for both parties to agree not to disparage or say anything detrimental about the other after termination. In this way it therefore also protects the reputation of the employee and the employer and allows both to feel secure that the dispute will not damage their ongoing development.
It is also possible to enter into a settlement agreement during employment in respect of an ongoing complaint or grievance and resolve this dispute, so that the parties involved can move on and draw a line under this particular issue, allowing the employee to continue with their employment and the employer to know that the matter cannot be raised in the Employment Tribunals.
Settlement agreements are a common and useful way for employers and employees to resolve disputes, or potential disputes.
The ACAS Guide on Settlement Agreements can be found here
Do I need legal advice?
Yes. A settlement agreement is only valid if independent legal advice has been given on the terms of the agreement. This can be provided by a solicitor, barrister, trade union representative or advice centre worker. It is crucial to obtain independent legal advice by someone completely unconnected to your employer and by someone who is qualified to advise you on the claims you may have and value of those claims.
What payments can I expect under a settlement agreement?
The Settlement Agreement will set out the employee’s contractual payments, those are the payments which the employee must be paid under the contract of employment. Sometimes an employee is paid in lieu of their contractual notice, in which case the employee shall receive their notice pay in one lump sum, rather than during the life of their unexpired notice pay.
It is important that any accrued but untaken holiday pay is provided for in the agreement. Sometimes an employer will seek to compel the employee to take any untaken holiday in any remaining notice period. Depending on the terms of the employee’s contract of employment this may be something the employee wishes to push back on.
Bonuses, Commission & Other Remuneration
If the employee is due commission, bonus or overtime then the amounts owed should be set out in the agreement. A solicitor should check the employee’s contract to ensure all such payments are paid in full.
A solicitor should advise the employee in relation to ongoing loss of pension, particularly if the employee has a final salary pension. Pension contributions should continue during any notice period, along with all other benefits, unless the contract says otherwise. If an arrangement is reached with the employer for a lump sum to be paid into the employee’s pension fund as part of the settlement terms then part of this may be eligible for tax relief up to, currently £40,000.
Medical Insurance and Life Insurance
Some schemes will allow an employee to remain in them for the period beyond the termination of the employee’s employment. Other schemes will require this benefit to terminate on the last day of employment. However, it is always a good idea to find out if the insurer will offer enhanced terms if the employee stays in the scheme on their own account once the employee’s contract of employment has terminated. This can be investigated prior to the termination date.
In addition to the contractual payments a settlement agreement will usually provide for a compensatory payment to be made. This is the payment the employer is making to settle the employee’s potential claims. This payment can be made free of tax up to £30,000 currently under the tax exemption.
Is the termination payment offered reasonable?
We will always discuss with the employee the payments offered under the Settlement Agreement and advise the employee on whether this is overall an acceptable deal. This will be based on the circumstances surrounding the employees exit and any potential claims which may arise in connection with this. If the employee is not leaving their employment, this evaluation will be based on the value of their potential claims. We will always provide the employee with advice as to whether there are any such claims and calculate what the employee might be awarded if they were to pursue the claim in an Employment Tribunal. However, there are other considerations such as the time and expense of pursuing such a claim, the stress involved and also other factors such as confidentiality and reputational concerns. We take a pragmatic and legal approach ensuring that the employee gets the best all-round advice.
If we are instructed that the termination payment is inadequate and the employee wants us to negotiate an increase, we will negotiate on the employee’s behalf to ensure a fair and reasonable amount is paid. This may mean pursuing internal procedures such as a grievance or appeal alongside the settlement negotiations. Such additional advice and negotiation will usually need to be paid for by the employee as it outside the scope of the advice paid for by the employer on the terms alone.
As part of any settlement agreement it is advisable to request that an agreed reference is attached to the Settlement Agreement with a clause providing that the employer cannot derogate from this agreed reference and must provide an oral reference in no less favourable terms. This ensures that the employee can be as certain as possible that the reference will only be given in the agreed terms and that they apply for new jobs safe the knowledge that the reference will not be unfavourable.
Settlement Agreements often contain a clause which reaffirms existing post-termination restrictive covenants in the employee’s contract of employment or introduces new restrictions. We normally advise employees to push back against these because they are not part of the settlement and the employer usually already has the benefit of such restrictions in the employee’s contract of employment. An employee should also ensure that the employer has not increased the scope and length of the restricted period.
The confidentiality clause is an extremely important part of the Settlement Agreement for both the employee and employer. Both parties will normally want to ensure that agreement remains confidential and thereby preserve the relationship and reputation of each party. However, care must be taken to allow employees to talk with their family and professional advisers.
Both parties will also want to ensure that the other cannot make derogatory or detrimental comments against the other. Such clauses should always be reciprocal ensuring that both parties can walk away from the dispute knowing that their reputation is intact.
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