We have experience in acting for both employers and employees in relation to Settlement Agreements. Please get in touch by contacting us on 01343 544077 if you require advice.
What is a Settlement Agreement?
A Settlement Agreement (previously named “Compromise Agreement”) is a legally binding agreement used where an employee is leaving the employment of their present employer and there are potential employment claims that will be waived, generally in return for a termination / compensation payment.
Generally, the two sides will have agreed to the termination of the employment, perhaps because there is a redundancy situation or where a dismissal is likely following a disciplinary situation. Whatever the circumstances, it is usually the case that a severance package is on the table and the Settlement Agreement will set out the terms of the proposed agreement in detail. A Settlement Agreement only becomes legally binding once it has been signed by both parties.
Settlement Agreements have to meet certain requirements and cover certain matters to be effective and binding and these requirements are governed by statute. They can also only be entered into if the employee has been advised by an independent adviser such as a solicitor.
Therefore before an employee signs a Settlement Agreement, they must have received independent legal advice in order for it to be binding.
Does the employee have to sign the Settlement Agreement?
An employee does not have to agree to sign a Settlement Agreement offered by their employer but in many cases it is the best option for both parties. There will usually be an alternative to signing the Agreement e.g. the employee may be made redundant an only receive their statutory entitlements as opposed to an enhancement; or the employee may be dismissed (sometimes without notice) if the disciplinary allegations are proven.
What will the ‘severance package’ be?
Other than general terms included in every Agreement (see below), each Settlement Agreement and severance package will be unique.
However, usually included will be:
- a sum of money representing compensation for loss of employment (up to £30,000 of which can be paid tax free);
- payment of accrued but unused holiday pay (subject to the normal tax and National Insurance contributions;
- relevant notice or often payment in lieu of notice (subject to the normal tax and National Insurance contributions);
- a contribution to the employee’s legal fees; and
- sometimes an agreed employment reference.
Depending on the situation, the severance package can also cover things like getting to retain a company car / laptop / mobile phone and the extended use of benefits such as private medical or dental cover.
The compensation sum is very dependent on each individual situation and varies based on the nature and length of employment; the manner and circumstances leading to the Agreement; length of employment; and prospects of obtaining new employment.
In a redundancy situation, whilst the Settlement Agreement will normally be offering an enhanced redundancy package, the starting point is usually the employee’s statutory redundancy entitlement. Some employers have contractual enhanced redundancy payments or collective agreements govern this situation in certain industries e.g. offshore.
In some situations the compensation sum will be negotiable but not always. These negotiations can be done either via the solicitor or directly between the employee and the employer. Notice and holiday will either be contractual or the employee’s statutory minimum requirements and therefore don’t tend to be negotiable.
When is payment made to the employee?
The deadline for making the various payments will be stated within the Settlement Agreement which can be anywhere between 7 and 28 days from the termination date or the employer’s receipt of the signed Settlement Agreement, whichever is later.
What will the terms of the Settlement Agreement be?
A Settlement Agreement will usually cover some of the following standard clauses:
- The termination date (note, this is often before the Settlement Agreement is signed)
- Arrangements prior to termination of employment e.g. whether the employee remains at work or is placed on garden leave
- Arrangement on termination e.g. return of company property
- What payments and benefits the employee will receive
- A tax indemnity by the employee
- A reference
- A waiver of claims by the employee
- Mutual confidentiality in relation to the terms and existence of the Settlement Agreement as well as the circumstances leading to the termination of employment
- Restrictions on use and disclosure of confidential information e.g. trade secrets, customer information
- Post termination restrictions (usually only if they are contained in the employee’s contract of employment)
- Employee Warranties
- Provisions for a breach by either party
- Agreed Announcement to be circulated to staff / clients / customers
Further comments on a few of these terms are below:
Confidentiality is key in a Settlement Agreement. Both parties will be bound to keep the terms and existence of the Agreement confidential apart from a few agreed exceptions. For example, the employee can discuss it with legal and professional advisers and immediate family as long as they agree to keep it confidential and the employer can discuss with employees necessary for the processing of the payments.
Often a Settlement Agreement will contain a clause relating to an employee reference. Whilst an employer is not legally obliged to provide a reference, it is common to agree the wording of a reference. Often it will be the employer’s policy to only provide a basic date and fact reference with no further information but as part of the negotiations of the severance package, employees are often able to get an agreed positive reference included as party of the Settlement Agreement. It is usually included as a schedule to the Agreement and it is agreed that it will be provided in the event that a reference is requested from a prospective employer.
There is usually a clause in a Settlement Agreement to the effect that the employer will make a contribution to the employee’s legal fees in relation to obtaining legal advice on the terms and effect of the Settlement Agreement up to a maximum figure.
In most cases, this will be enough to cover our fees without having to issue a further fee to the employee. However, if the contribution does not cover our entire fee – either because it is a relatively low contribution or because there has been lengthy negotiations – an additional fee would be issued to the employee to cover the balance.
What is the effect of signing a Settlement Agreement?
By signing a Settlement Agreement, it brings the employment relationship to an end. Importantly the employee is also waiving their right to bring claims against their employer or if they have already brought claims, they agree to withdraw them.
There is usually a long list of claims included within the Agreement which the employee is agreeing to waive, such as unfair dismissal, discrimination, breach of contract among others.
Claims unable to be waived by the Agreement are claims to enforce the Agreement itself; claims related to accrued pension rights; and claims for latent personal injury.
How long will it take to finalise?
Employers should give employees a reasonable time to consider any offer of a Settlement Agreement – recommended to be at least 10 calendar days – bearing in mind that they will have to seek independent legal advice usually before they will be prepared to accept any offer.
From then, the process is often very quick and can be completed with a matter of days if there are no complications or delays and minor negotiations on the severance package or the terms of the Settlement Agreement. If there are lengthy negotiations, it can take up to a few weeks.
How we can help
If you need help with a Settlement Agreement, either as a business or an individual, get in touch with us for an initial chat – which is free of charge and without obligation.
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