A settlement agreement is a legally binding contract that changes or terminates an employment contract. It is most often used when it is mutually beneficial for an employee to leave their job, for example, in a voluntary redundancy situation or where the employer-employee relationship has broken down.
A settlement agreement allows for employment to be ended without the need to work through a notice period. In return for a compensation payment, the employee will agree not to pursue any legal claims against their employer.
When to use a settlement agreement
If it is necessary to make an employee redundant then they may be prepared to accept a settlement agreement in return for leaving more quickly, for example, without going through a lengthy consultation process or working out their redundancy notice period. In addition, the document is used in voluntary redundancy situations.
Settlement agreements are also a way of resolving disputes between employer and employee so that legal proceedings can be avoided.
Key clauses in a settlement agreement
As well as specifying how much will be paid to the employee and obtaining their agreement not to pursue legal claims against the employer, the settlement agreement will also provide further protection to both the employer and employee.
The agreement should be tailored to the particular situation but would usually include the following key provisions:
Waiver of legal rights to bring a claim
The employee will waive their rights to bring a claim such as for unfair dismissal or breach of contract. This should be drafted carefully to minimise the risk of future claims. However, certain rights cannot be waived, including the right to bring a claim for personal injury that the employee was not aware of at the time the agreement was entered into and the right to accrued pension entitlement.
How the notice period will be handled
The agreement will include basic details such as the date employment will end as well as whether the notice period will be worked or not. If it is agreed that the notice period will not be worked, then the employer will make a payment in lieu of this.
The amount of the compensation payment
As well as statutory redundancy pay, the employer will make a payment to compensate the employee for agreeing to leave and waive some of their rights. All sums payable to the employee should be set out in the agreement, including any entitlements that may be owed such as bonus payments or commission.
Confidentiality clause
The employee will be required to keep the terms of the settlement agreement confidential, and this can be extended to include confidentiality in respect of the existence of a settlement agreement. The employer can also agree to keep matters confidential.
The clause will not cover issues such as reporting discrimination or harassment, reporting an offence to the police, whistleblowing, reporting misconduct to a regulator, disclosing information to HM Revenue & Customs, seeking legal or medical advice or giving evidence in a criminal or regulatory investigation as these are rights that cannot be waived.
Non-derogatory clause
The parties would normally also agree not to make any derogatory statements about the other in the future. Agreement can also be reached about the contents of any announcements that are made about someone leaving, either internally or to the public or other organisations.
Agreement to provide a reference
The wording of a reference can be agreed upon in the settlement agreement so that the employee can be sure of what will be said to any future employer.
Warranty
The employee will usually be required to confirm that there are no circumstances which mean that the employer could dismiss them without notice, such as negligence or gross misconduct.
Payment for employee’s legal advice
It is a legal requirement that an employee takes independent legal advice before signing a settlement agreement as it is a waiver of some of their rights. The employer traditionally pays a contribution towards the cost of this.
Tax indemnity clause
This clause will specify each party’s liabilities should there be a future demand for tax from HM Revenue & Customs. The employer would normally agree to notify the employee of any demand and in return, the employee will indemnify the employer in respect of any interest or penalties that may be imposed if payment is late.
Negotiation
It is common practice for the employee or their representative to negotiate some of the clauses of a settlement agreement. At Witan Solicitors we have extensive experience in dealing with settlement agreements, including drafting robust settlement agreements, entering into settlement agreement negotiations and providing legal advice for employers who are going through the redundancy or dismissal process with employees.
Contact us
It is vital that a settlement agreement is well-drafted and that it provides the employer with as much protection as possible.
If you are considering making employees redundant and you would like to discuss your options with an expert employment lawyer, email us at info@witansolicitors.co.uk or fill in our contact form. We have offices in Birmingham, London and Northampton and our employment law solicitors will be happy to provide settlement agreement advice, guidance and representation.
