Settlement agreements advice for employers
Whether you’re looking at drafting a settlement agreement or facilitating settlement agreement legal advice for employees you’ll need to navigate the possibility of reaching a settlement in situations where a claim has arisen or might arise. Speak to an experienced employment lawyer about practical law settlement agreement advice from the outset.
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What is a settlement agreement?
A settlement agreement is a legally binding agreement between an employer and an employee that settles certain legal claims. Usually the employee accepts a sum of money in return for agreeing not to bring certain legal claims against the employer. In this way, the employees’ rights are ‘settled’. The agreement would usually set out any other terms that form part of the settlement, such as that the employer will provide an employment reference to the employee and that the employee will agree not to make any derogatory statements about the employer or any of its directors, managers and staff.
Agreements between employers and their employees, in which the employee agrees not to sue the employer in this way are very common and can be an effective means of managing a situation before it escalates into a dispute, or to defuse an existing dispute.
What different employment rights do employees have?
Employees may have claims against their employer under statute (e.g. for unfair dismissal, whistle blowing or discrimination), under their contract of employment (e.g. for notice pay), and under other common law rights such as negligence (e.g. personal injury). These claims may arise on recruitment, during employment or on termination. In many cases, the employer will want to make a payment to the employee in return for an effective waiver of such claims. This may happen where employment is continuing, but its most common for the parties to do so where employment has terminated (or is about to do so).
Can the employee’s employment rights be waived in the settlement agreement?
Many contractual or common law rights can be waived merely by this being set out in a written document and that document being signed. However, any agreement to settle or waive most statutory claims (such as unfair dismissal and discrimination claims) will not be legally binding unless its either agreed through ACAS, or recorded in a settlement agreement (before July 2013 these were referred to as ‘compromise agreements’ and you may hear some people still mistakenly use that term) that complies with certain statutory requirements.
One of these requirements is that the employee has received independent legal advice from an adviser identified in the settlement agreement before signing the agreement. This is to ensure he or she understands the terms of the agreement and its effect upon his or her ability to present a complaint to an employment tribunal. This gives employers the protection that the employee will not be able to breach the agreement and pursue a claim by saying they were not fully aware of what they were entering into. The employee must be covered on their legal adviser’s insurance policy in the event that the legal adviser misinforms the employee as to their position. This again gives protection to the employer if the employee is misadvised as they would need to take this up with the legal adviser. It doesn’t mean that the employee regains the ability to sue the employer.
The other requirements are that:
- the settlement agreement must be made in writing;
- relate to particular complaints or proceedings (usually all possible claims an employee might be able to bring are listed in the agreement);
- be signed by the parties; and
- must record that the requirements regulating settlement agreements have been satisfied
We’ve experience of drafting settlement agreements that comply fully with the required legal standards so that you can be assured that your position is protected – the primary effect of a valid settlement agreement is that an Employment Tribunal will no longer be able to hear claims based on the employee’s statutory, contractual and common law rights. If a settlement agreement isn’t valid, then the employee may still be able to pursue a claim against you, and you might already have paid them a sum of money believing that all claims were settled, which could involve having to sue the employee to get that money back.
It’s usually the case that most claims that the employee might have relating to personal injury arising from their employment would also be settled by the settlement agreement. In some situations, this might also stop the employee from bringing future claims relating to injuries which they allege arise after they’ve actually left your employment, although this would not cover personal injury claims which haven’t yet arisen.
The law restricts certain claims from being settled, including those relating to an employee’s accrued pension rights and in respect of a ‘protective award’ during a collective consultation where 20 or more employees are being made redundant in a 90 day period. Employees can also enforce the agreement itself.
Speak to our specialist employment lawyers for advice on drafting settlement agreements or to provide legal advice to your employees in bulk settlement agreement exercises. Contact us on or and we’ll call you.
What legal advice should I offer my employees on settlement agreements?
A settlement agreement is only valid when the employee has received independent legal advice. The law only requires the legal adviser to advise on the terms and effect of the agreement and the adviser will sign to say they’ve given the employee that level of advice and that they have the required level of insurance.
Given the benefit to the employer of the employee receiving that advice (i.e. the settlement is not binding without it), its usual for the employer to pay for the legal advice that the employee receives.
The standard contribution to legal costs ranges from around £250 plus VAT to £500 plus VAT in ‘standard cases’, up to £2,000 to £3,000 plus VAT or more in the case of very senior employees and so this is something you should factor in to the overall amount that entering into the settlement will cost you - in some situations, it might be appropriate not to offer any contribution to legal costs although this would be unusual. We can advise what level of contribution might be appropriate in each individual situation.
Employees might seek to negotiate on the package you’re offering including the level of contribution towards their legal costs and again, we can advise where that might be appropriate. It’s worth remembering that in employment disputes, the default position is that both parties must cover their own legal costs and so we can often push back on requests to cover all of an employee’s costs in this situation.
How much should I offer the employee under a settlement agreement?
Generally speaking, the employee will be concerned to make sure that any settlement sum buys out a reasonable assessment of the likely value of any legal claims, when taking account of the likely prospects of success and the likely legal costs of any such claims and the risks associated with it. The employee isn’t required to seek legal advice on whether the package that you’re offering them is a ‘good deal’, but in reality, many might chose to do so (though this would often be at their own expense), and so pitching the settlement at the right level can be important and cut down on the scope of any further attempts by the employee to negotiate on the package. We can help you to assess the right level of settlement in each case.
Compensation for many employment claims is based upon losses that the employee has suffered and will go on to suffer (such as the loss of salary and pension for example). Given that predicting such losses can be difficult – the employee might secure another job relatively quickly and so not suffer much if any losses – this can be used for example to resist calls for settlements based upon significant claims for future loss of earnings. The offer of providing a job reference or the waiver of restrictive covenants for example might also be of value to the employee and so might be used to persuade an employee to accept a lower level of settlement than they had otherwise wanted.
Certain payments can be structured in a way which make them more tax efficient and hence more attractive to an employee and persuades them to accept a settlement.
What else goes into a settlement agreement?
It’s often the case that the terms of any employment reference will be referred to in the settlement agreement and perhaps any announcement that’s to be made to the rest of the workforce. Clauses restricting what the employee can say about your business and the settlement once they’ve left your business are also often included, though care has to be taken not to prevent the employee from disclosing certain ‘wrongdoings’ or ‘blowing the whistle’ such as covering up sexual harassment for example. We can advise you on the most appropriate forms of ‘non-disclosure’ clauses to include in the settlement agreement to ensure as far as possible that any reputational harm to your business is minimised. The settlement agreement can also be a helpful tool to remind departing employees of their obligations under any restrictive covenants or other obligations in their contracts of employment that will continue to bind them (or indeed introduce new restrictions).
What are the benefits of a settlement agreement?
The benefits to you and your business of a settlement agreement can include as follows:
- Certainty - Having to defend employment tribunal proceedings can come with a large degree of unpredictability and reputational risks and so entering into a settlement agreement removes that uncertainty.
- Costs - If you have to defend an employment tribunal claim or have to deal with internal processes, such as a capability or grievance procedure, the costs of taking advice on this will likely be significant compared to those you incur on dealing with a settlement agreement.
- Time - Internal processes such as performance management can take several weeks or even months to conclude. Even then, if the employee pursues a claim, employment tribunal proceedings can take 12 to 18 months in some cases to conclude. A settlement agreement in some cases can take less than two weeks to conclude.
How do I approach an employee on settlement?
The law allows parties to an existing dispute to hold conversations and have communication between each other where they’re genuinely attempting to resolve that dispute. This is known as the ‘without prejudice rule’. This can apply in the employment context, though sometimes it can be hard to know what a ‘genuine dispute’ might be – if an employee has raised a grievance for example, in some cases that could be a dispute, whereas in other situations it might not be. Where discussions are genuinely ‘without prejudice’ they’re not allowed to be referred to in legal proceedings, and so this can encourage the parties to speak more candidly about the issues and the ways to resolve those issues without fear that they might be compromising their legal position if the matter were to develop into a tribunal claim.
Similarly, allows employers and employees to hold discussions with a view to discussing termination of employment that might be caught in an unfair dismissal situation, such as in cases of misconduct, performance or ill-health. These are referred to as ‘protected conversations’. However these protected conversation only cover unfair dismissal type situations and don’t cover for example, discrimination claims, and so care should be exercised in their use (though the same conversation might also be ‘without prejudice’ and so sufficient protection might exist).
With both of these rules, care should be taken to make sure that any communications are not oppressive or discriminatory as this could lose the protection that these regimes can offer.
We can discuss with you how to approach having these conversations and draft appropriate letters and scripts to use in these situations for you. Speak to our experienced employment lawyers for all your settlement agreement needs, contact us on or and we’ll call you.
What if no settlement is reached?
Ultimately, an employee might decide after discussions or negotiations that they don’t want to enter into a settlement. Often it can be sensible to have a contingency plan or have two processes running side by side so that any inactivity in dealing with the employee’s grievance whilst settlement discussions are ongoing cannot be used as a criticism by the employee. Sometimes, keeping any internal processes, such as performance management, ongoing, can be an effective way to convince an employee that entering into a settlement is perhaps the best option for them.
We’ve extensive experience in making sure that all procedural steps are kept in check whilst any settlement discussions are taking place enabling you to have the best chance of a resolution. Speak to our specialist employment lawyers on or today and we’ll call you.
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