While a settlement agreement generally allows employees to leave their workplace on more favourable terms, it may not always be the best legal option.
As a result, when it comes to being offered an employment settlement agreement by your boss, how do you know that you’re receiving a fair offer?
Fortunately, the team of highly-knowledgeable employment law solicitors at Freeman Jones Solicitors have years of invaluable experience helping employers and employees alike to negotiate and sign fair settlement agreements.
To help you understand the importance and benefits of an employment settlement agreement, we’ve created a comprehensive settlement agreement checklist for employees.
From the purpose of these agreements to how they work and what they should include, we cover all these crucial details below.
What is a settlement agreement?
Formerly known as compromise agreements, an employment settlement agreement simply refers to a legal contract drawn up between an employee and their employer through which their employment with the company is terminated.
This legally-binding arrangement typically involves an employer paying their employee a sum of money in exchange for the employee not pursuing a tribunal or court claim.
However, an employment settlement agreement can also involve an agreement from the employer to stop treating the employee unlawfully.
The terms should set out all relevant severance payments, including notice period salary, redundancy, holiday, and any other relevant sums.
These settlement agreements are typically confidential, and both parties are expected to stick to the agreed upon terms.
What is the purpose of a settlement agreement?
The main purpose of an employment settlement agreement is to avoid the fees, litigation, time, and effort involved in taking a claim to tribunal or court.
Settlement agreements are common between employers and employees, but they’re also used to settle property disagreements as well as divorce and martial disputes.
Put simply, an employment settlement agreement can help employers and employees alike to avoid a lot of legal hassle.
How do settlement agreements work?
If you’re feeling daunted by the prospect of negotiating an employment settlement agreement with your employer or are struggling to understand the advantages of this solution, we can help. Below, our team of expert solicitors explore the process of how settlement agreements are created and how they work.
The first step to any settlement agreement is typically an invitation to attend a meeting at a convenient time and place with your employer. Your employer may not make the reason for the meeting transparent, but if you’ve recently raised a grievance about unfair treatment, you might reasonably expect an invitation to one of these meetings.
Settlement agreement meeting
If you accept your employer’s invitation to attend the meeting, your employer will explain their concerns and proposal, including the settlement package. They should also make the consequences of the employee remaining at the business clear, such as any disciplinary procedures.
This meeting should be neutral to help avoid arguments, focusing instead on the terms and benefits of the employment settlement agreement.
Receive a written offer
Once the meeting has taken place and the employee has agreed to review the offer, they should receive a formal, written settlement agreement offer. This can either be in the form of a letter outlining the terms (such as how much money they will receive if they accept the offer) or the full agreement itself.
As a legal requirement of a settlement agreement is that the employee must be advised by an independent advisor, the employer will normally arrange this consultation and contribute financially towards the associated legal fees.
Seek independent legal advice
If you find the terms of the contract agreeable, your employer will arrange for you to see the full settlement agreement (if you haven’t seen it already) and ensure you have taken independent legal advice.
Independent legal guidance is essential for understanding your employment rights, as well as the fairness of the proposed settlement package, any tax implications, and the potential consequences if you decide not to accept the settlement.
The settlement agreement itself should also be certified by a solicitor. If a settlement agreement doesn’t come with a certificate signed by either a solicitor or another kind of legal advisor, it won’t be considered legally-binding.
Once the employee has received independent legal advice and is happy with the terms of the settlement agreement, both parties should sign the contract. Signing the contract will make the agreement legally-binding, and the employee can often start looking for new employment (subject to any contrary terms in the settlement agreement).
As the employee is able to leave the business under more amicable circumstances, the employer will often supply them with a good work reference, helping to support them with finding and securing future employment opportunities.
What should a settlement agreement include?
While a settlement agreement typically involves the exchange of financial compensation from the employer to the employee, this is not the only term that should be included in an employment settlement agreement.
According to the Employment Rights Act 1996, section 111A explains that certain conditions must be met for an employment settlement agreement to be considered legally-binding. First and foremost, the agreement must be in writing and be in relation to a particular complaint or proceeding.
The employee must also be able to make an informed decision following advice from an independent advisor, most often a solicitor. This solicitor should be able to explain the terms and effects of the proposed settlement agreement as well as the implications this might have on the employee’s ability to raise a complaint or pursue a tribunal claim in the future.
The adviser themselves must also be identified in the employment settlement agreement and protected from any claims the employee might make for losses incurred from the advisor’s guidance. This protection is typically in the form of professional indemnity insurance.
Another legal requirement adds that the settlement agreement must state that the relevant statutory conditions have also been satisfied. Once these legal requirements have been met, a settlement agreement can include any number of clauses and various terms depending on the complexity of the settlement.
There are many essential clauses that shouldn’t be excluded from this type of contract. From non-disclosure agreements to tax indemnities and practical issues, these contracts should include all the necessary clauses to facilitate a clean break between the employer and employee.
One of the most important additions to a settlement agreement typically includes signing away the right of the employee to bring legal claims against their employer relating to unfair dismissal, discrimination, or breach of contract.
Why would an employer offer a settlement agreement?
Employers tend to offer settlement agreements when they want to end an employee’s contract on more favourable terms than firing them. An employment settlement agreement often helps employers to avoid a tribunal claim that could result in the employee receiving a greater sum.
Alongside having more associated legal fees, tribunal claims are also more lengthy legal procedures that both employees and employers typically want to avoid going through. Instead, a settlement agreement allows for a clean break between the two parties and can bring a swifter conclusion to the matter.
If you’ve raised a grievance to your employer about unfair treatment, have recently been disciplined by your employer, or have appealed being made redundant, your employer might decide to offer you a settlement agreement.
Do employers have to pay legal fees for settlement agreements?
While there is no legal obligation for an employer to pay the employee’s legal fees when creating an employment settlement agreement, most employers will at least contribute to covering an employee’s settlement agreement legal fees.
In many cases, however, the employer will cover these costs entirely to make the process quicker and easier, while also ensuring you’re not left out of pocket. These solicitor legal fees typically range between £300-£1000 plus VAT.
How long do employees have to consider a settlement offer?
Based on ACAS (Advisory, Conciliation and Arbitration Service) guidance, it is best practice (as a general rule) for employers to offer their employees 10 calendar days to consider the written settlement agreement.
This should give the employee enough time to read through all the terms and seek independent legal advice before making a decision. However, if the circumstances of the case are more complex, the employee may require a longer, more reasonable period to consider the proposed offer.
Ultimately, the period that employees have to consider a settlement offer is decided between themselves and the employer. If your employer fails to provide you with a reasonable amount of time to consider the terms of the settlement agreement and seek independent legal advice, it can be used as evidence in a subsequent unfair dismissal claim.
Can an employer go back on a settlement agreement?
Worried that an employer might withdraw their settlement offer? Unfortunately, an employer can cancel the settlement agreement at any time up until the contract has been signed by both parties. However, this also means that an employee can go back on the settlement at any time prior to signing.
Can an employee refuse to sign a settlement agreement?
An employee is well within their rights to refuse to sign an employment settlement agreement. Typically, the employee has three options when presented with a settlement agreement – they can either accept the offer, refuse it, or attempt to renegotiate.
If you do decide to refuse a settlement agreement, they employer may still be able to fairly terminate your employment with the company regardless. As a result, it’s best to contact an independent solicitor and receive professional legal advice before agreeing to sign any employment settlement agreement.
What happens if a settlement agreement is not reached?
In the event that renegotiation fails to achieve the desired outcome, the relevant procedures relating to the particular complaint or proceeding must be followed. The employer may decide to terminate your employment and the employee may decide to raise a tribunal claim.
It’s worth noting, however, than an employee has just three months minus one day from the date of their termination to make this tribunal claim. Furthermore, any settlement agreement discussions made during the negotiation period are confidential and therefore cannot be used against either party in the event that a settlement agreement isn’t reached.
Is a settlement agreement a good idea?
Settlement agreements are generally considered a good idea if you want to avoid potentially costly and time-consuming legal action. This is because it’s not always guaranteed that you’ll win a tribunal claim as an employee, no matter how strong you case might seem.
Furthermore, you will be able to leave your position at the company on more favourable terms than taking them to tribunal or having your employment terminated. However, if you do decide to sign a settlement agreement, you should understand that you will be relinquishing your right to raise a tribunal employment claim.
Ultimately, every employment settlement agreement case is different, so you should always seek independent legal advice before agreeing to (or refusing) any settlement agreement offer.
Searching for settlement agreement support?
If you’re struggling to come to an agreeable settlement agreement and require expert support from experienced solicitors, please don’t hesitate to contact Freeman Jones Solicitors today.
Regardless of whether you’re being offered a settlement agreement as part of a redundancy arrangement or you don’t want to return to work following maternity leave, we can help you to obtain a fair employment settlement agreement.
With a professional solicitor on your side, settlement agreements can be negotiated, drawn up, and signed, bringing the matter to a swift conclusion.
While we’re based in Chester, we also have offices across the UK including in locations like Liverpool, Warrington, and Wrexham. If you’d like to learn more about our employment law settlement agreement experience or services, please feel free to give our friendly team a call on 01244 506 444.
Once you’ve reached out, we can arrange your free, no-obligation, 20-minute consultation regarding your employment settlement agreement.