Employment for Individuals
Desley Sherwin

Settlement agreements

If you find yourself in a redundancy situation at work, you may be asked to enter into a special type of contract called a Settlement Agreement (formerly called Compromise Agreements). 

Part of the Settlement Agreement process specifies that the Agreement must be reviewed by an independent legal adviser who checks that it is suitable and includes everything it should do to ensure that the Agreement is valid and enforceable. Our employment law team can do this for you.

What is a Settlement Agreement?

A Settlement Agreement is a legally binding document between you and your employer.  It is a contract whereby you agree to receive a severance package from your employer, in return for giving up your rights to bring a claim against them in the Tribunal or Court, in the event that perhaps you feel that you have been unfairly selected for redundancy or discriminated against.

They are often used to shorten what could be a long and drawn out process, or where the employer and employee wish to ‘draw a line’ under a potentially contentious situation such as a redundancy. Additionally, a Settlement Agreement may also be entered into if an employer wishes to enhance the redundancy payment over and above the statutory minimum that is required to be paid by law.

The Agreement sets out details of your severance package, and how this is calculated.  This may include:

  • Usual salary and benefits to an agreed termination date
  • Notice pay (Payment in Lieu of Notice, or PILON).  This covers payment for any statutory or contractual notice period that you will not be working. It is important that this is checked by a solicitor to make sure you are receiving the correct PILON, as it is often treated differently for tax purposes.
  • Holiday pay. You may have accrued but not yet taken holiday, for which you may be entitled to receive additional payment. Alternatively, if you have taken more holiday than your pro-rated entitlement, your employer may wish to deduct the value of the excess holiday taken from the sums to be paid to you.
  • Bonus and commission.  If you are entitled to a contractual bonus or commission payment, you should still receive this as part of your severance payment. Your solicitor can check that this is being paid at the correct level.
  • Pension. Your Settlement Agreement may contain details of pension arrangements.  Sometimes, employers may add a lump sum to pensions on termination of employment (for tax efficiency). Also, we can check whether your employer pension contributions should continue during your notice period.
  • Medical insurance.  If you have medical insurance paid for by your employer, this may continue for a period, depending on the exact terms of the scheme.  We will be able to check this for you.

Checking the amount offered

We will check the amount of any discretionary lump sum or enhanced payment that has been offered by your employer.  This will depend on your personal situation and the reasons for your employment termination, but if we feel that there should be more compensation offered, we can advise you accordingly.  We can also negotiate with your employer on your behalf to ensure you receive a fair settlement.

References

Settlement Agreements usually set out details of what reference your employer will provide and, in many cases, contain an agreed form of reference.  It is always useful to have a copy of the reference attached to the Settlement Agreement, so that you know what will (and will not) be sent to potential new employers, should a reference about you be requested.

Post-Termination Restrictions

Depending on your role and the type of business you are involved in, the Settlement Agreement may contain covenants which, for example, may restrict you from working for a competitor business within a set period.  It is very important to have these checked – employers should not  make such covenants excessively restrictive, and of course, if they do restrict your ability to earn a future income for a period of time, then this should be accounted for in the amount of severance pay you receive. We can advise you on the enforceability of such covenants.

Confidentiality issues

This is a very important part of a Settlement Agreement, governing who you can tell about your employment termination, or what you are able to tell future employers about your reasons for leaving. The confidentiality restrictions will also specify very limited third parties who can be told about the Settlement Agreement (e.g. your partner/immediate family and your professional adviser).

Non-derogatory clauses

If the employment relationship is ending in a less than amicable manner, both parties may be concerned about what the other will say to third parties, especially on social media! It is quite common for reciprocal non-derogatory clauses to be set out: these prevent each party from saying negative things about the other in future.

How we can help with your Settlement Agreement

Our employment law specialists have extensive experience of drafting, reviewing, advising on and helping individuals with Settlement Agreements.  Using their knowledge and experience, they will check that the terms of the Agreement and amount being offered are fair, and if required negotiate with your employer to reach more favourable settlement terms for you. If executing a Settlement Agreement is not in your best interests, they will advise you of your other options, including asking ACAS to conciliate, and taking the dispute to an Employment Tribunal.

How much will it cost?

Your employer will usually pay a contribution towards the cost of a solicitor giving you advice on your Settlement Agreement up to an agreed amount (“the employer’s legal fees contribution”).  Our charges will depend on the complexity of the Agreement and if there are any issues that we feel need clarification or further negotiation. 

Get in touch with our employment law solicitors

Please contact our specialist employment law team for further information and to make an appointment.  We will be happy to answer any questions you may have.

 

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