Settlement agreements (if done correctly) are legally binding agreements that are mostly used to bring employment relationships to an end. Used to offer a clean-break type scenario on a mutual basis for an employer and employee, settlement agreements usually involve a lump sum payment to compensate an employee in return for (amongst other legal promises), their agreement to waive their rights to pursue any specific legal claims.
For a settlement agreement to be legally binding, one of the key legal requirements is that an employee must first take legal advice on its terms and effect before signing the agreement. The idea is to protect a non-legally trained individual from entering in an agreement full of legalese without fully understanding the implications of it. The legal advice must be received from a qualified professional such as a solicitor or legal executive. Without the advice from a qualified individual, the agreement is not a legally enforceable document.
The skills and expertise of the person who advises on the Settlement Agreement is irrelevant as to whether it is binding or not. As long as they are a Solicitor or Legal Executive then they can sign it and the employee and employer would be bound by it. This is where we see issues arising all the time, as some non-employment specialist lawyers will sign a Settlement Agreement for an employee believing that it is a simple and straightforward transaction. But this is often not the case!
If you are an employee faced with a settlement agreement, here we explore why it is important for take legal advice from a lawyer that specialises in employment law.
As mentioned above, one of the key provisions set out in a settlement agreement is that an employee agrees to waive their right to pursue any claims against their employer. This includes claims such as unfair dismissal, discrimination and constructive dismissal.
A specialist employment lawyer will be able to identify and advise you as to whether you may have any claims available to you, the implications of waiving your right to pursue a claim, and what your options are if you were to decline the agreement.
An employment lawyer will therefore be able to ensure that you are not being pressured into accepting a settlement agreement especially on an unfair deal.
Where possible, an employment lawyer will also be able to assess and advise whether the terms of the settlement agreement restrict your future actions or employment for example, through the use of post-termination restriction clauses. Our lawyers are experienced in negotiating and where possible, will seek to address any overly restrictive terms on your behalf.
As part of the process, you are ending your employment and are waiving your rights to pursue any claims and in return you agree to accept a sum of money as compensation (sometimes otherwise known as an “ex gratia” payment or termination payment). It is therefore important (since you will be out of work for an unpredictable time) that the offer made is fair in light of your circumstances including your length of service and any claims which you may have.
An employment lawyer will have the knowledge and experience to quickly ascertain and advise you as to whether you have received a low offer and discuss your options with you. As mentioned above, our employment lawyers are experienced at negotiating and will be happy to discuss this in more detail should you wish to explore this further.
In addition to the compensation payment, an employment lawyer will have knowledge and experience of any contractual and statutory payments that you would be entitled to. These payments include your notice pay, accrued holiday pay, any bonus payable for the financial year. Our employment lawyers check that any applicable payments are correctly reflected in the agreement and if there are any irregularities, these are resolved before you sign the agreement.
Most settlement agreements are prepared by employers who have, in most cases, utilised a template however, it is important to be aware that one size does not fit all in the context of settlement agreements.
Depending on your position and length of service it may be that certain bespoke clauses need to be added to the agreement. For example, an agreed announcement of your departure, receipt of any bonus payment or specifying any property that is agreed to be retained. A legally trained employment lawyer will be able to assist with drafting bespoke clauses.
Whilst unable to give specific tax advice, specialist employment lawyers will be able to identify and advise what payments are subject to tax. Compensation payments are usually paid tax free up to a maximum of £30,000 and any payment beyond that is taxable.
It is important to know that there are circumstances where a portion of the tax-free amount could be taxable due to a change in the law in 2018 regarding post-employment notice pay. An experienced employment lawyer will be able identify if this applies to your circumstances and ensure (to avoid any future liability) that the agreement correctly reflects the position so that the employer pays the tax due.
Aside from the key settlement provision, there are other contractual obligations that you agree to when signing the agreement which can crucially affect you if you fail to comply. A specialist employment lawyer will have sound knowledge of these and will ensure that you fully understand your obligations before you sign the agreement. These include returning property including confidential data belonging to the employer before a specified deadline or ensuring you keep matters confidential failing which could result in the employer being released from their obligation to pay you the compensation payment and leaving you with a legal bill.
Most employers utilise templates to draft settlement agreements. This commonly results in drafting issues, clauses not flowing or reading properly because bits have been edited out. Given that it is intended to be a legally binding agreement, it is important that the agreement is presented well. An employment lawyer will be able to identify and address any mistakes with your employer when addressing or clarifying any outstanding points.
To conclude, settlement agreements are intended to be mutually agreed and so with that in mind, it is important to ensure that you are not coerced into accepting the terms as first proposed especially if it is clear that you have rights which are worth pursuing.
An employment lawyer will be able to quickly highlight to you whether you have any claims and whether you are receiving a fair offer or whether there is room to negotiate. Ultimately, the decision is yours as to what you wish to do but being able to protect yourself and make an informed decision is specifically what a specialist employment lawyer will be able provide you with.
If you have been faced with a settlement agreement and have any initial questions, please feel free to get in touch with a member of our team.
Equally, if you are an employer and would like assistance with the drafting of a settlement agreement please also feel free to contact us.
Appointments are available by telephone or via video call, so no matter where you are in England or Wales we can assist you.
The information contained in this blog post is provided for guidance and is a snapshot of the law at the time it is written. It is provided for your information only and should not be used as a substitute for obtaining legal advice that it specific to your particular circumstances.
The guidance should not be relied upon in any decision making process. It is strongly recommended that you seek advice before taking action.
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