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What is a Settlement Agreement?
- Upon the termination of employment an Employer may offer certain terms of severance and require the employee to enter into a legally binding document known as a 'Settlement Agreement' to record the terms of settlement.
- The Settlement Agreement usually provides for the Employee to receive a severance payment from the Employer in return for which the Employee will agree not to pursue any claim he or she may feel they have, nor take the matter to an Employment Tribunal.
- In addition, the Settlement Agreement will deal with other matters, such as contractual notice periods in the Contract of Employment and provide for a 'payment in lieu' of such notice requirement
- Employers often require a Settlement Agreement as a means to prevent an Employee making possible future complaints to an Employment Tribunal, particularly in redundancy situations.
- Because Settlement Agreements are formally recognised by Employment Law Acts they are the only way agreed severance terms can be binding without tribunal proceedings.
- In order for a Settlement Agreement to become enforceable, it is a requirement that the Employee has the Settlement Agreement explained in detail to him/her by an Independent Solicitor.
- It is also a requirement that the Solicitor providing the advice to the Employee also sign the Legal Adviser's Certificate to the Settlement Agreement to certify that the appropriate advice has been given to the Employee.
When and why are Settlement Agreements used?
- Employers must comply with the law in making redundancies (for example, through formal consultation and a fair selection criteria etc). If this is not done properly then an Employee can choose to complain to an Employment Tribunal that the redundancy was unfair. Indeed this action may be taken after the Employee has been made redundant and may, if successful, result in an award of compensation for the benefit of the Employee or even reinstatement.
- Settlement Agreements in redundancy situations are used mainly by Employers who want to prevent Employees, after they have been made redundant, from complaining to a Tribunal (a specialist employment law court).
- To ensure an Employee will not complain to an Employment Tribunal after the Employee has been made redundant an Employer will often offer an 'ex gratia' (gift) payment to the Employee in return for the Employee signing away his/her rights to make a claim in a Settlement Agreement. This has the effect of turning the redundancy package into a "full and final" settlement of any claims the Employee may have against the Employer.
- Settlement Agreements are also used in employment situations where employment contracts come to an end, other than redundancies, and they have the same "full and final" settlement effect.
What must the Settlement Agreement contain?
- A Settlement Agreement should detail the full breakdown of the payments the Employee is to receive, including the extent to which the tax free payments will be made.
- Up to approximately £30,000.00 compensation can be paid to an Employee without deduction of income tax. However, often the Employer will require the Employee to give a promise that if the Inland Revenue believe that tax should have been paid, then the Employee will pay the tax (an indemnity).
- "The Settlement Agreement will also provide for confidentiality both in terms of the Employers business affairs and trade secrets and also in respect of the terms of the Settlement Agreement (the Silencing clause). The Employee is usually paid a small additional sum for agreeing to this, which can be in the region of a few hundred pounds.
- The Employee will normally also be required not to make any derogatory comments against the Employer. Employees can request that such agreements are mutual, and most Employers are often receptive to such request.
- Most existing employment contracts will include post-termination restrictive covenants that the Employee is already bound by. Settlement Agreements often reaffirm the Employee's legal obligation to abide by these promises. This may mean the Employee is prevented from working for a competitor and/or old clients after they leave the company. It should also be noted that a Settlement Agreement may also introduce new covenants with further restrictions. Therefore, legal advice is essential to ensure the Employee is aware that these restrictions limit the type of work the Employee can do to earn a living, during the restriction period. The advice should also look at whether the compensation payment within the Settlement Agreement is adequate in the interim.
- The amount the Employer will contribute towards the Employee's solicitors' fees will usually be set out in the Settlement Agreement.
- The Employer is required to provide an extensive list of statutes (such as the Race and Sex Discrimination etc) under which the Employee will agree not to bring a claim. These are included to enable the Settlement Agreement to be enforceable as full and final. Therefore the Employee should not be unduly concerned in this respect as the Settlement Agreement is intended to be in full and final settlement.
Why is a Solicitor needed for the Employee?
- A solicitor will advise the Employee whether what is offered in the Settlement Agreement gives appropriate protection and consider whether you are being offered a suitable amount of compensation payment.
- The words and paragraphs in the document can be lengthy and difficult to understand, particularly because of the reference to statute and Regulations. Obviously it is important that the Employee fully understands what they are being asked to sign. In the circumstances it is a legal requirement that the Employee takes independent legal advice on the terms of the Settlement Agreement.
- In addition, it is a legal requirement that the Employee's solicitor signs the Settlement Agreement to confirm that the Employee has received formal legal advice on the content of the document.
- The law states such advice MUST be given by either a qualified lawyer, a qualified trade union official, or a qualified advice centre worker.
- The law states these advisers MUST be covered by an appropriate certificate of indemnity insurance.
- The solicitor should be informed of the number of years of employment, your salary, job title, and most important of all, the reason for the termination. These are all important factors for the solicitor to be aware of.
Do I have to sign the Settlement Agreement?
- The Employee is not under an obligation to sign a Settlement Agreement if it is not what the Employee wants to do. However, it is important for the Employee to be aware what will happen if he or she does not sign the Settlement Agreement and so it is important that the Employee obtains legal advice on the consequences of not signing.
- There is no agreement between the Employee and the Employer if the Settlement Agreement is not signed. In this case the Employee will have the ability to make a claim to the Employment Tribunal. There is a time limit that your claim must be within 3 months of the termination date.
- "If the Employee does not sign the Settlement Agreement, in the case of a redundancy, it is likely the Employee will not be given a full redundancy package, though would still be entitled to the statutory minimum pay. It is essential to get legal advice on whether legal action is likely to compensate sufficiently above what the Employee may have been offered in the Settlement Agreement.
- The solicitor can advise the Employee on possibly improving the terms of the Settlement Agreement for their benefit and / or seek to negotiate improvements on the Employee's behalf. Sometimes changes can be made to the terms offered by means of negotiation. However the amount the Employer will contribute towards the Employee's solicitors fees will usually be limited to advising on the terms of the Settlement Agreement, and will not cover additional advice for acting for the Employee against the Employer or negotiating further/improved term for benefit of the Employee. You should discuss the legal fees with your solicitor.
To make an appointment for advice on a Settlement Agreement prepared by an Employer, or to draft terms to be offered to your Employee please contact us on 0845 217 1377 or email: email@example.com.