What does a Settlement Agreement do?

Signing a Settlement Agreement means an employee signs away the right to pursue a specified employment-related claim against their employer. This is why it is absolutely vital for employees to receive the right legal advice prior to making the decision to sign. In return for the employee waiving their right to pursue a claim, the employer will provide them with some form of consideration (usually, though not always, financial) as compensation.

Settlement Agreements also frequently contain provisions on specific matters that have been agreed between the parties. Common examples being:

• Confidentiality.
• Post-termination restrictions on employment. E.g. geographical restrictions.
• References.
• Contribution, if any, to the employee’s legal fees.

Why should you use a Settlement Agreement?

For both employees and employers, there are a number of benefits to using Settlement Agreements.

For employees, a Settlement Agreement allows them to receive compensation for a dispute or complaint against their employer without having to go through the expensive and time consuming process of an employment tribunal claim, and without the risk, the Employment Tribunal may not find in their favour. The employment tribunal procedure is likely to take upwards of six months, within which an employee could have no source of income, and can be an extremely stressful and emotionally draining process. A Settlement Agreement avoids this entirely and ensures the employee has some source of income while they are out of work and not receiving a regular wage. They can also contain advantageous clauses, as mentioned above, such as the promise of a good reference, being allowed to keep a company car, or being paid non-statutory holiday pay, that simply wouldn’t be possible in taking a case to a Tribunal. Another important factor is that any compensation award for loss of employment up to the value of £30,000 will, in general, be made tax-free.

For employers, Settlement Agreements avoid the potential for significant costs and negative publicity associated with defending a case against a disgruntled employee. They can also avoid the cumbersome and protracted procedures required for redundancies which, even if followed correctly, can still result in a claim being brought before the Employment Tribunal. A validly executed and legally binding Settlement Agreement will prevent an employee from being able to bring a claim before an employment tribunal and will result in the matter being brought to a close.

Do I have to sign?

Settlement Agreements are voluntary agreements and you don’t have to sign if you are unhappy with any aspect of what is being proposed. However, as mentioned above, there are significant considerations that must be taken into account in deciding to take a claim to a tribunal instead. If you feel you have a potential claim against your employer, let your solicitor know all the details. They will be able to advise you on all aspects of the agreement and any claim you may have and will help you to make a decision in your own best interests.

How do I know if the financial award is fair?

There is no exact formula for determining whether a financial award is fair but, as a general rule, since the employee is waiving their right to bring any claim, the amount offered should reflect the value of the claim being given up.

As an employee, some questions you might wish to discuss with your solicitor regarding the fairness of a financial award would be:

• Do you have a potential claim against your employer?
• If so, how likely is your potential claim to succeed at tribunal?
• If your claim was successful, what financial award would you be likely to recover?

Your solicitor will be able to help you weigh these up and advise on whether the award contained in the Settlement Agreement is fair and whether it is in your best interests to accept it. If you have a very strong claim you are likely to receive a much higher termination payment, and vice versa.

What are the legal requirements of a Settlement Agreement?

For a Settlement Agreement to be legally binding and enforceable, it must meet certain requirements:

• Settlement Agreements must be in writing.
• The Agreement must make reference to a specific event, dispute, complaint or proceedings.
• Before signing the Agreement, you must have received independent advice; this could be from an employment lawyer or an authorised member of a trade union.
• The adviser you choose must have a contract of insurance or professional indemnity, which covers the risk of a claim.
• The Agreement must identify the independent adviser.
• You must be given reasonable time to consider the terms of the Agreement. Under the Acas Code of Practice on Settlement Agreements, a minimum of 10 calendar days, unless the parties to the Agreement agree otherwise.
• The Settlement Agreement must state that the applicable statutory conditions regulating the Settlement Agreement have been met.

What should be included in a Settlement Agreement?

Every Settlement Agreement is different, but there are certain things that will normally be included to allow both parties to move forward with confidence. Including:

• A notice period, which may include garden leave.
• Details of any payment to be made, including when payment will be made, how much, and if any tax will be due on the payments. The Agreement should also set out whether payments relate to termination of employment or something else such as outstanding holiday pay or compensation.
• Details of the employment claims that are deemed to be settled once the Agreement has been finalised.
• Warranties, which may include things such as returning company property or matters related to confidential information.
• Details of the legal advice you have received.
• A confidentiality clause.
• A claw-back clause, allowing your employer to ‘claw-back’ any sums paid to you if you breach the terms of the Settlement Agreement.
• A reference to allow you to move on in employment and often a company statement.

What happens after I accept the terms of a Settlement Agreement?

If you accept the terms of a Settlement Agreement that has been offered to you, and you have received independent legal advice on the terms of the Agreement, you can sign the Agreement and return it to your employer.

Your employer will then identify the 'termination date', which is the date when the employer-employee relationship will come to an end. Your employer will create a schedule including the termination date and the dates of any payment to be made to you. You may also receive a reference allowing you to find alternative employment.

On the termination date, the employer-employee relationship will come to an end. You will leave your job and waive any right to bring a claim before an employment tribunal in relation to matters set out in the Agreement. In exchange, you will receive the compensation that was agreed. You must continue to abide by any terms of the Agreement, such as those relating to confidentiality. 

Contact our Settlement Agreement Solicitors Glasgow and Paisley

Contact our employment law solicitors in Glasgow and Paisley for advice on Settlement Agreements or any other employment issues you may have. Contact us today.

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