What is a settlement agreement?
An employment settlement agreement, historically also known as a compromise agreement, is a form of contract between an employer and employee whereby the parties agree to terminate employment by consent.
In many cases, the employer will agree to pay the employee an amount exceeding their contractual entitlement in order to encourage the employee to agree to the terms of employment termination.
For the settlement agreement to be binding and legally enforceable, certain legal requirements must be met which include:
- A form of wording which lists the various potential claims the employee will contractually agree to waive;
- The employee must have been independently advised by a qualified lawyer.
Why are settlement agreements offered?
There are many different reasons why an employer might decide to offer an employee a settlement. There can also be situations where an employee suggests a settlement agreement to their employer, but care should be taken by an employee considering this and it would be advisable to take legal advice prior to taking such a step.
Some of the more common reasons for settlement agreements:
- Where there has been a complete breakdown in the employment relationship and the employer no longer wants the employee to attend work;
- Where an employee has intimated a potential claim or has raised a grievance;
- Where the employer has started disciplinary process;
- Where the employer is making redundancies.
Can an employee refuse a settlement agreement?
Employees can refuse to enter into a settlement agreement. However, in many cases the offer of a settlement agreement can be considered an indicator that the employee’s position at work is unstable, and that the employer no longer sees a future for the employee at their place of work. Consequently, refusing the offer of a settlement agreement may mean that the employee is just delaying his or her departure, and potentially also giving up some of the benefits of entering into a settlement agreement voluntarily.
Negotiations about the terms offered
Depending on the circumstances, there is often scope for some negotiation of the settlement sum which is being offered to an employee in relation to a settlement agreement. Where relations are amicable and the employee is a long standing and loyal member of staff, an employer may be more willing to negotiate. Conversely, where relations have broken down, for example if an employer is worried about a potential claim, this may be helpful for an employee seeking to negotiate on the sum offered.
Other factors which could be relevant to the negotiation include:
- How much the employer has offered as a starting point (a typical starting point tends to be the employee’s contractual entitlements plus an additional 2 or 3 months salary, tax free);
- How valuable the offer is to the employee: in some cases, an employee will be confident that he or she can secure alternative employment quickly, but in other cases the employee may have concerns about their future career prospects;
- The underlying reason for the offer and inherent risks and delays of the employee pursuing an employment law claim;
- Employees understanding and acting appropriately to fulfil their duty to mitigate loss.
Important terms in settlement agreements
Some of the key clauses in settlement agreements include:
- References: employees are not legally entitled to a reference. Where relations are acrimonious, employees often benefit from a contractual agreement that the employer will provide a reference, and potentially agreeing in advance the wording and content of that reference. This can provide some important comfort for employees who are seeking new employment.
- Confidentiality clauses are often important from the employer’s perspective, keeping the existence of the settlement agreement and its terms confidential, as well as safeguarding confidential information about the employer. For technical legal reasons, if this is agreed, the employer may agree to pay a further amount of money to the employee for including such provisions.
- Full and final settlement: the employee will need to be aware that he or she will agree to waive their rights to pursue almost all claims which might have arisen against their employer during the course of their employment.
Settlement Agreement Solicitors London
If you need advice on an employment settlement agreement please get in contact. We have years of experience and offer a fast turnaround and often can work within the fixed fee contribution offered by the employer. Importantly, we also have strong negotiation skills should you decide to seek more money from your employer and we have 5 London offices so are an ideal choice if you need an employment lawyer locally in London.