Settlement agreements were formerly known as compromise agreements. Although renamed, a settlement agreement compromises any claims that the employee may have against the employer. Typically, under a settlement agreement offered by the employer, they will make a payment in exchange for the employee promising not to bring any claims against the employer which have arisen out of the employment relationship. In other words, the employee is compromising their right to bring any claims in exchange for a termination payment or compensation.
The settlement agreement sets out the terms and conditions of the employee's departure from the employer organisation.
What is the purpose of settlement agreements?
The purpose of a settlement agreement is to prohibit any potential claims that the employee may have against the employer, such as claims for unfair dismissal, discrimination, or breach of contract.
Settlement agreements are often used when an employer wishes to terminate an employee's employment, through redundancy, (mis)conduct or what is known as “capability” under the legislation which can be based on either performance or illness, but the employer will want to ensure that there are no future claims against them. It is frequently the case that in order to avoid the time and cost involved in a redundancy consultation or a procedure covering disciplinary or capability issues, the employer will offer a settlement agreement to the employee.
On some occasions, an employee may approach the employer and request a “protected conversation” and ask for a settlement agreement. One example is where an employee has raised a grievance against their employer and the parties want to settle the matter without going through a formal grievance process.
At Winston Solicitors, our team of experienced solicitors and legal advisers can guide you through the process of negotiating a settlement agreement that is tailored to your needs and provides you with the best possible outcome. We understand that each case is unique, and we take a personal approach to ensure that your interests are fully represented.
What does a settlement agreement look like?
To be legally binding, a settlement agreement must meet certain requirements. The agreement must be in writing, it must relate to a particular complaint or proceedings, the employee must have received independent legal advice on the terms and effect of the agreement, and the adviser must have professional indemnity insurance.
Visually, a settlement agreement looks like a contract of employment. The name of the employer and employee are set out on the cover page. There is space for a date to be inserted once the agreement is signed by all parties.
More often than not, definitions are set out next within the agreement although sometimes they may be included within a Schedule to the agreement.
The agreement will then clearly state that by signing the agreement, neither the employer nor the employee is admitting liability (legal responsibility) for any act or omission that has caused financial loss or injury to feelings.
The substantive key contents of a settlement agreement are:-
- Termination date: this will be the date on which the employment will end. In some situations, the employment relationship may have already ended. It does not matter if the settlement agreement is completed after the termination date. If the termination date is set for a date in the future, the employee may be required to sign a reaffirmation. This is discussed in more detail below.
- The employee will be paid as normal up to and including the date of termination. All usual benefits including annual leave will continue to accrue up to the date of termination and then cease.
- Notice period: there are several ways this may be dealt with.
- Worked. The employee may be asked to work the notice period. During this time, the employee remains bound by the contract of employment. The termination date should be set at a date in the future to reflect the length of the notice period.
- Garden leave. The period of garden leave usually mirrors the length of the notice period. While the employee is expected to carry on working, the employer usually imposes restrictions on the amount of work required during the garden leave period. Often the employee is simply required to conduct a handover or, just be available as and when required. The employer will usually request that the employee remains away from the office during the period of garden leave and that they do not contact either colleagues or customers/clients/suppliers/business associates of the employer.
- Payment in Lieu of Notice (PILON). If the employer does not require the employee to continue working, it may choose to set a termination date and then pay an amount equivalent to the length of the notice period. A PILON will usually be expressed as a gross lump sum and will be subject to tax and national insurance deductions.
Please note that some employers may mix and match how they deal with the notice period. They may request the employee to work part of the notice period and then pay the remainder in lieu.
- Termination payment: This may also be referred to as an ex-gratia payment or compensation payment. Whilst the employer is obliged to pay notice and holiday pay, the termination payment is discretionary. However, this is the payment within the settlement agreement that should incentivise the employee to sign the agreement and promise not to pursue any claim against the employer. This payment is tax-free up to £30,000.
- The value of the termination payment is subject to the circumstances leading up to the settlement agreement being offered. On average, a settlement agreement will provide for around 3 months’ net pay.
- The termination payment will only be made if the employee warrants (confirms) that certain statements are true. Typical provisions include:-
- The employee is not aware of any circumstances which would, if known by the employer, result in a summary dismissal for gross misconduct;
- At the date of the agreement, the employee is not in receipt of, nor have they accepted, an offer of employment
At Winston Solicitors, we have a proven track record of successfully negotiating settlement agreements for our clients. Contact us today to take the first step toward resolving your employment dispute.
- Pension: The settlement agreement will usually state that the employer will notify the Pension Scheme that the employment has been terminated. Following termination, the pension will freeze. We would recommend seeking specific pension advice should you have any concerns.
- Legal Fees: Typically, under a settlement agreement the employer will contribute to the employee’s legal fees of obtaining advice on the terms of the settlement agreement. On average, the fee contribution is £500 plus VAT.
- Waiver: As set out above, a settlement agreement is typically offered by an employer in exchange for the employee agreeing to terminate the contract of employment and promising not to bring any claims against the employer. However, a settlement agreement should not stop the employee from lodging the following claims:
- A claim to enforce the terms of the agreement
- Accrued pension rights
- Latent personal injury claims
- Indemnities: The employer will deduct tax and national insurance from both the notice pay and holiday pay before these are paid to the employer. The same applies to any part of the termination payment over and above £30,000. However, on some occasions the employer may incorrectly calculate those liabilities therefore, the indemnity is essentially an agreement by the employee to reimburse the employer for any tax and national insurance.
- Company property: Typically, the settlement agreement will state that by no later than the termination date, the employee shall return all company property. The employee should consider whether this is sufficient time or request 7-10 days to make arrangements to return the property. Sometimes, employees can negotiate to keep company equipment as part of the settlement agreement.
- References: The terms of a reference are usually appended to the settlement agreement. Often the reference goes no further than to confirm the start date, end date, and job title.
- Post-termination restrictions/Restrictive Covenants: These are often set out within the contract of employment and will continue to be enforceable for a period after the termination date. These are discussed below in more detail.
- Confidentiality: This is a continuing obligation and applies not only to the insider information gained during the employment relationship but also in respect of the terms of the settlement agreement. Often, the settlement agreement will stipulate specific individuals with whom the employee can discuss the terms of the settlement agreement on the basis that confidentiality is maintained by those individuals.
- Reaffirmation: Where an employee has entered into a settlement agreement before the termination date, the employer may stipulate that the employee has to sign a reaffirmation within a specified time frame after the termination date (i.e. 7 days after the termination date). The reaffirmation is a further promise by the employee that the terms of the agreement are true and accurate, particularly the warranties.
Settlement agreements and redundancy
A settlement agreement may be proposed to an employee in circumstances where the employer is contemplating redundancy consultations.
A redundancy situation may arise for one of the following reasons:-
- Complete business closure;
- Business relocation;
- Reduced need for staff
An employee who has more than two complete years of service has the legal right to not be unfairly dismissed. Where an employer fails to engage in a redundancy consultation, an employee may have grounds to pursue a claim for unfair dismissal. A settlement agreement will seek to compromise, amongst others, a claim for unfair dismissal. Therefore, whilst the settlement agreement will typically make provision for the notice period, holiday pay, and statutory redundancy if the settlement agreement does not offer more than the statutory minimum (i.e. notice, holiday, and statutory redundancy) why would the employee sign the agreement?
Employment restrictive covenants are clauses within employment contracts that restrict an employee's ability to work for a competitor, start a competing business, or take customers or clients away from the employer. Restrictive covenants are usually in place for a specified period after the employee has left their current employment. These clauses are designed to protect an employer's business interests.
There are several types of employment restrictive covenants, including non-compete clauses, non-solicitation clauses, and non-disclosure clauses. Such covenants should be limited to a reasonable period of time. The contract of employment will state how long any restrictive covenant remains enforceable after the termination date. On average, restrictions remain in place for between 3 – 6 months.
- A non-compete clause prohibits an employee from working for a competitor or starting a competing business for a specified period after the termination date.
- A non-solicitation clause prohibits an employee from taking the employer's clients, customers, or employees.
- A non-poaching clause prohibits the employee from seeking to hire or persuade other employees to leave the same company.
A non-disclosure clause prohibits an employee from disclosing confidential information or trade secrets that they may have gained while working for the employer. Such a clause will usually be indefinite.
It is possible to negotiate the enforcement period of the restrictive covenants as part of the settlement agreement negotiations.