Settlement Agreement Solicitors - Employment Compensation

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A compromise or settlement agreement is a statutory arrangement involving an offer from an employer to an employee to agree to mutually terminate the employment relationship, usually to pay salary to a certain date, to pay part or all of the contractual notice period and often make an ex gratia payment (which can be tax free up to a maximum of £30,000.00).

To be legally binding the employee must have received separate, independent legal advice, usually from a solicitor, generally paid for by the employer. Please contact our solicitors for thorough, expert and impartial advice if you have been offered a compromise or settlement agreement or if you are an employer wishing to avoid possible claims arising on redundancy or disputes with employees.

When acting for employees, in the vast majority of cases, our solicitors can :-

  • work within the employer's budget, so there is no charge to you as employee
  • take your instructions very quickly, generally on the same day
  • advise you by telephone/fax/email so you do not have to attend our offices

What is a settlement agreement?

This document, usually drafted by a specialist employment solicitor, is intended to be a binding, legal agreement between an employer and an employee, entered into following the employee’s termination of employment. Under the terms, the employee receives a specified amount of money as severance pay, in return for which the employee agrees not to pursue any legal claims before an Employment Tribunal.

In general, the law does not allow a person to contract out of their employment rights. Compromise agreements, now called settlement agreements were introduced under the Trade Union Reform and Employment Rights Act 1993, are one exception to this rule.

The use of compromise / settlement agreements is becoming increasingly common in redundancy situations. Employers must comply with certain statutory requirements when making redundancies. If an employer fails to meet these requirements, the employee can make a claim to the employment tribunal after the redundancy, complaining that it was unfair and seeking compensation.

Having an employee sign a compromise / settlement agreement is the only way that an employer can ensure that the employee will not complain to a tribunal and it represents a full and final settlement of any legal claims the employee may have against the employer.

What does a settlement agreement contain?

All of these documents vary in their details according to the specific circumstances however they are usually drafted by a specialist solicitor upon instructions from an employer. There are certain key matters that most all agreements cover :-

  • amount of compensation to be paid, including any tax-free component
  • any restrictions being placed on future employment
  • confidential matters, such as trade secrets and the terms of the agreement
  • any assurances given by the employer and/or employee
  • the reference that will be given by the employer
  • settlement of any claims which the employer may have against the employee
  • what the other employees will be told about the termination
  • mutual agreement not to make derogatory comments

In the proposed document you will see a long list of statutes under which you are agreeing not to bring claims. The employer must list these statutes in order to be able to enforce the agreement as a full and final settlement. Compromise and settlement agreements must be detailed and specific. The courts have ruled that “blanket agreements,” under which the employee simply signs away all their rights to bring a legal claim, is not enforceable.

What are the requirements to be valid?

The following requirements must be met in order for the document to be valid :-

  • it must be in writing
  • it must relate to a specific complaint held by the employee
  • it must identify the adviser
  • the adviser must carry professional indemnity insurance
  • all requisite conditions must have been met
  • the employee must receive legal advice from a qualified independent adviser, which includes a compromise / settlement agreement solicitor, regarding the terms of the proposed agreement as well as its effect on the employee’s ability to make a complaint to an Employment Tribunal

As mentioned above, the law requires that an employee obtain legal advice before signing in order for the agreement to be valid. You cannot waive this right to legal advice. By signing, you sign away very specific legal rights. This requirement exists to help ensure that an employee fully understands the implications of entering into an agreement.

The Employment Rights (Dispute Resolution) Act 1998 states that the only individuals who can provide this advice are a qualified lawyer, a qualified advice centre worker or a qualified trade union official. This individual must also carry the appropriate indemnity insurance. A compromise / settlement agreement solicitor will fully satisfy these requirements.

What are the benefits?

One important thing is that it does is provide certainty for both the employer and the employee. The employee knows exactly how much compensation they will receive, and the employer knows that no legal claims will be brought against them.

A valid compromise / settlement agreement ensures you a specific amount of money as compensation for losing your job. Should you pursue a claim in an Employment Tribunal, there is no guarantee that you will be successful.

Bringing a claim in an Employment Tribunal can be a lengthy and stressful process. A compromise / settlement agreement brings a close to the situation much more quickly and provides a “clean break” for both parties. It minimises the risk of any problems or complications related to the end of the employment.

Am I obligated to sign?

You are not obligated to sign. If you refuse to sign, you retain your right to make a claim to the employment tribunal.

In redundancy situations, however, refusing to sign could result in your receiving a lesser settlement. Your employer could elect to pay you the minimum state entitlement, which is nearly always less than the full redundancy package. It is imperative that you seek the advice of a qualified compromise / settlement agreement solicitor before turning it down.

Renegotiating the terms is an alternative to refusing to sign. Changes to the proposed document are not unusual and sometimes result in a larger settlement.

Why do I need legal representation?

Of course, the main reason why you need a solicitor is that you must receive legal advice in order for the agreement to be valid. Solicitors are statutorily defined as qualified to provide the requisite legal advice in these situations. Your adviser, be it a solicitor or otherwise, must sign the agreement to certify that the advice has been given.

Compromise / settlement agreements are legal documents, which means they are chock full of legalese. A solicitor will explain the contents of the agreement to you in plain English, and make sure that you fully understand the meaning of each term.

A solicitor can also help you negotiate new terms if you are dissatisfied with the offer made by your employer. Once you sign the agreement, it is final, and you no longer have the right to complain to a tribunal. Because of this, it is critical that you fully understand what you are agreeing to.

A compromise / settlement agreement solicitor will advise you on whether the agreement offers you suitable protection and whether the amount of compensation being offered is adequate. Factors a solicitor will consider when determining the fairness of the agreement include the reason for your termination, the number of years you have worked, your job title and your salary.

One way a solicitor can assist you is to help you identify any potential claims you may have against your employer, such as discrimination or unfair dismissal, for example. A solicitor can assess the likely value of such claims in order to determine whether signing or pursuing a legal claim is likely to be more beneficial.

How much will it cost?

Receiving the requisite legal advice should cost you nothing. Typically, your employer will cover the legal expenses. The amount of legal expenses which will be covered will likely be stated in the terms of the agreement.

Should the solicitor undertake negotiations on your behalf, however, there may be additional legal expenses. Your compromise agreement solicitor would advise you of this possibility in advance if the need for negotiations arises.

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