A settlement agreement is a contract between an employer and an employee that resolves employment-related issues. A separate legal counsel is required.

 

Typically, in the settlement agreement, the employee waives his or her right to bring employment claims in exchange for a discretionary termination payout. This could be in the form of an enhanced redundancy payout or an office loss compensation payment, for example.

Legal advice independence for settlement agreements

The employee is required by law to get independent legal counsel regarding the terms and effects of the settlement agreement, in particular its impact on the employee’s capacity to bring claims before an employment tribunal. If this rule were not in place, it would be considerably easier for employers to exert pressure on employees to waive their claims. The independent legal counsel must be covered by an insurance policy or indemnity against the risk of a claim by the employee.

What other legal conditions must settlement agreements satisfy?

• The settlement agreement must be in writing;

• it must address specific grievances;

• it must be specific. The settlement agreement must specify that the statutory requirements governing such agreements have been met.

The Advisory, Conciliation and Arbitration Service (Acas) has prepared a comprehensive reference on \ssettlement agreements, which clearly sets out the legal criteria.

Negotiation

It is essential to evaluate the employee’s current salary and determine whether a higher sum may be negotiated. This will involve evaluating prospective claims against the employer, their likelihood of success, and their value. A broad estimate of potential expenses associated with pursuing claims should also be considered. Each side is often responsible for their own costs in the employment tribunal. The time required for a claim to be heard by the tribunal must also be considered. All of these considerations must be balanced against the offer to determine whether or not it is reasonable. The independent legal counsel must determine if the transaction is advantageous.

Depending on the potential claims the employee may have and the value of those claims, it may be possible to negotiate a greater settlement amount in some instances.

Even when the employee has no future claims, it is occasionally viable to negotiate a higher compensation package. An employer may be willing to increase the offer based on good faith, even though there is no legal justification for doing so.
Tax

The first £30,000 of a termination payment is generally exempt from tax and national insurance contributions (NICs). There are, however, numerous exceptions. A sum matching to earnings for notice is one of the exceptions subject to tax and NIC deductions.

Legal costs for settlement agreements

Typically, the employer contributes to the employee’s legal fees associated with getting legal counsel on a settlement agreement. The employer is not required by law to contribute, although it is a widespread practise. If additional legal fees are required, the employee is typically responsible for covering the difference unless the employer agrees to increase the payment.
A reference may be negotiated and included to the settlement agreement. Typically, the employer would then be required to submit the agreed-upon reference to prospective employers. In several industries, particularly the financial sector, it is customary to provide merely a factual reference with employment dates and job title. Nonetheless, a factual reference could be included to the settlement agreement. In certain instances, it may also be prudent to agree on an internal announcement.
Confidentiality

Typically, employees will be forced to sign confidentiality agreements. A common clause (also known as a non-disclosure agreement or gag order) could prohibit the employee from disclosing to third parties the terms of the settlement agreement and the circumstances behind their leaving. Typically, a clause will contain exclusions for disclosure to immediate family, professional advisors, and as needed by law. Additionally, the employee is frequently permitted to disclose their job history and the reason for their departure to future employers and recruiting consultants.
Employees are not prohibited from blowing the whistle (making a public disclosure) or reporting to law enforcement.
The government has recently announced reforms to combat the abuse of nondisclosure agreements.

Non-derogatory expressions

Frequently, firms will compel employees to promise not to make negative remarks about their employer or comments that could harm the reputation of the employer.
Employers may agree to insert a reciprocal provision for the employee’s protection. As it is difficult for employers to enforce such agreements, the language may be confined to “taking reasonable efforts” to prevent employees from making insulting remarks, or it may say that employees are prohibited from making such remarks.

The employer shall instruct certain designated employees (about whom the employee is concerned) to refrain from making such remarks.

Restriction clauses and settlement arrangements

Any competitive activity-related restrictive covenants in the employment contract could continue to apply and could be referenced in the settlement agreement. A period of time may limit an employee from joining a competitor or establishing a competing business. An employee may be prohibited from soliciting clients, interacting with clients, and recruiting workers for a period of time. As part of the settlement agreement, the employer might agree to waive or modify certain limits.

Bonuses

If the employee expects to receive a bonus, the settlement agreement should contain an appropriate clause. Occasionally, an employee may have received a previous bonus that vests at a later period. This compensation may be in the form of cash, stock, or options. Typically, when employees are laid off, they are viewed as good leavers and their rewards continue to vest on the typical dates or are accelerated. However, this is not always the case.
There may be additional factors to examine, and each instance will be unique.
This guide is for reference purposes only and should not be relied upon for particular recommendations.