Parting ways? Don’t want to fight? Don’t want to go to court? Don’t want your name dragged through the mud? Then you might want to consider a Settlement Agreement.
A Settlement or Compromise Agreement, (‘the agreement’) is a formal document that supports and records the mutual termination of a contract of employment that carries the potential to turn into a legal dispute.
It is most effective when both parties seek to settle a dispute that has arisen between them, as not infrequently happens when employment is terminated The settlement agreement sees the employer compensate the employee for relinquishing their employment rights in settlement of their potential claim(s) against the employer. In addition to monetary compensation, these agreements are often drafted to include clauses dealing with confidentiality.
Key features of settlement agreements.
When is it appropriate to use a settlement agreement?
As mentioned above, settlement agreements are typically used when an employer and employee are parting ways and wish to do so without embarking on a lengthy, stressful and expensive process.
How are terms decided within a settlement agreement?
The terms of any settlement agreement are entirely bespoke to the employee and are applicable to their specific circumstances and contractual obligations. The terms must be amicably agreed between both parties, employer and employee. Those terms are then documented in the written settlement agreement. The agreement identifies the compensation to be paid to the employee, in exchange for the employee’s cooperation to relinquish all claims against the employer. There must also be a clearly expressed waiver of the specific claims which the employee has or could feasibly have.
A variety of non-financial terms should also be considered and documented:
- a pre-written reference agreed by both parties, accompanied by a clause that ensures that the employer will only use the agreed wording when providing a reference for the employee
- a confidentiality clause, stating that the employee will keep the terms of the agreement, the settlement amount and the reasons for the agreement confidential
- a non-derogatory clause preventing the employee making derogatory remarks/comments/statements about the employer which are disparaging. The employee should also obtain a mirror clause preventing the employer making any such derogatory remarks
Which terms are excluded from settlement agreements?
The agreement will outline specific terms excluded from the settlement:
- accrued pension rights
- personal injury claims that the employee is not currently aware of
The settlement payments.
If the payment is being made ‘ex gratia’ (a payment made without legal compensation) or as damages to compensate for a breach of contract, and does not exceed £30,000, it is possible to make it free of tax. Professional advice should be sought before committing to any such payment.
The settlement agreement should contain a clear breakdown of the arranged payments and should also state whether any of them are to be paid to the employee free of tax.
How much should be paid in a settlement agreement?
This is bespoke to the case and depends on specific factors. It is wise to take into consideration:
- length of employment
- the circumstances that have brought you to the point of settlement agreement
- potential length of time, liability, cost and stress that it would take to settle a dispute and/or defend a claim in an Employment Tribunal in the absence of a settlement agreement
Are settlement agreements legally binding?
The agreement must meet a number of statutory requirements in order to be deemed valid. It is highly advisable that the agreement is drafted by an experienced professional who will do so with knowledge, care and attention. The law relating to such agreements is complex and proper professional advice should be sought as if the settlement agreement does not meet all of the points below, it will be deemed invalid, meaning that the employee is still able to bring claims against the employer:
- it must be written and must detail the particular complaints which the agreement is now settling
- 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)
- the adviser must be clearly identified in the written agreement and their advice must be covered by insurance
- any discussions between the parties relating to the agreement should also meet certain requirements. Such discussions should happen whilst bearing in mind that they could be used as evidence in legal proceedings if the agreement does not happen for any reason
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