Settlement Agreements (for employers)

What is a Settlement Agreement?

A Settlement Agreement is a written contract between an employer and an employee. It will usually involve the employee receiving a payment from the employer in exchange for settling all actual and potential claims against the employer.

When are Settlement Agreements used?

Settlement Agreements are most commonly used to bring an employee’s employment to an end on an agreed basis. However, they can also be used to settle workplace disputes. Settlement Agreements can therefore offer both employer and employee a clean break. They can also be used to avoid the cost and time of handling any workplace disputes and any potential employment tribunal claims arising from them.

Who offers the Settlement Agreement?

Usually, an employer will be the one to offer a Settlement Agreement. However, there are circumstances where an employee can approach their employer to suggest one, for example, if they’re experiencing issues in the workplace and are threatening to bring claims against their employer.

These discussions about offering a Settlement Agreement should be made on a “without prejudice” basis (meaning off the record) or as part of a “protected conversation” (again meaning off the record). This will mean that the Settlement Agreement can’t be mentioned as part of any court or tribunal claims or hearings.

What payments are usually made under a Settlement Agreement?

Although all circumstances are different, some of the payments commonly made under a Settlement Agreement are:

• Salary / bonus – for the period up to the employee’s last day of employment – subject to tax and national insurance contributions.
• Notice pay (unless the employee is working their notice period) – subject to tax and national insurance contributions.
• Compensation for loss of employment – worded properly in the Settlement Agreement, up to £30,000 of this payment can be paid tax free.
• Holiday pay – for the holidays that the employee has accrued but not taken as at their last day of employment – subject to tax and national insurance contributions.

What else should be included in a Settlement Agreement?

These are some of the important clauses to include:

• Settlement of all claims – saying that the employee can’t bring any claims against the employer in future.
• Confidentiality (sometimes called NDA’s or non-disclosure agreements) – saying that employer and employee must keep the settlement confidential.
• Negative comments (often called non-derogatory statements clauses) – saying that employer and employee won’t make negative comments about each other going forward.
• Post-termination restrictions – reminding the employee what they can’t do after they’ve left their employment, e.g. not to steal the employer’s staff.
• Announcement – agreeing some wording which announces the employee’s exit to staff and customers or clients.
• Company property – ensuring that the employee returns everything they have which belongs to the employer by a certain date.

How much time should an employee be given to consider the Settlement Agreement?

An employee should be given a reasonable amount of time to consider the terms of a Settlement Agreement, and this will vary from case to case. However, the guidance says that employees should be given at least 10 calendar days to consider a Settlement Agreement.

Can the employee negotiate the terms of a Settlement Agreement?

Potentially yes. In addition to receiving financial compensation, an employee might request other terms that would benefit them, such as an agreed reference or an agreed leaving announcement.

Does the employee need to get legal advice before signing a Settlement Agreement?

Yes, in order for a Settlement Agreement to become effective, an employee must receive independent legal advice on it. This ensures that the employee understands the Settlement Agreement and its effect on their ability to bring future claims against the employer.

Should the employer pay the employee’s legal costs?

It is common, and expected in most cases, that the employer will pay a contribution towards the employee’s costs in getting advice on the Settlement Agreement from a solicitor. This contribution will often range from £250+VAT up to £1,500+VAT, depending on how complicated the Settlement Agreement is.

Once it’s signed, who can know about the Settlement Agreement?’

Most Settlement Agreements will contain confidentiality clauses, meaning that the settlement or what has been agreed in the Settlement Agreement can’t be shared with anyone other than the employer and the employee. It’s common for the Settlement Agreement to include some exceptions to this rule however, for example, to allow both parties to tell their solicitors and accountants, and to allow the employee to tell their spouse, partner or close family.

If you need any advice on Settlement Agreements, please contact a member of our employment law team in confidence here or on 02920 829 100 for a free initial call to see how they can help.