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If you have been dismissed from your employment, you may be asked to enter into a contract limiting your legal rights in exchange for payment of money. In these circumstances you will need to take advice from a settlement agreement solicitor. This type of arrangement, usually drafted by a specialist settlement agreement solicitor, is a legally binding document, signed by both the employee and employer, containing agreed terms relating to termination of the employment. This type of contract came about as a result of legislation enacted in 1993, with the goal of legally binding both the employer and the employee to the conditions of a termination settlement. Important factors for both parties to bear in mind when crafting the agreement include statutory requirements, bargaining positions, personal and professional conduct and the terms of the employment contract. There are several reasons why employers are amenable to settling by consent. First, handling the matter privately prevents the possibility of negative publicity due to information that comes out during a hearing. Avoiding a hearing in front of the Employment Tribunal also saves the employer money. Finally, the employer can be certain of the amount he will be paying to the terminated employee :-

What is a settlement agreement?

A settlement or settlement agreement is a legally binding document which represents an agreement between an employee and an employer related to the employee's termination. In a settlement agreement, the employee agrees to give up their right to pursue any legal claim against the employer and the employer, in turn, agrees to pay the employee a specified amount of severance pay.

Settlement agreements were first introduced in the Trade Union Reform and Employment Rights Act in 1993. They are the only way that an employee can contract out of their employment rights and the only way that an employer can be completely sure that a former employee will not bring a solicitors claim in the Employment Tribunal.

What is included in a settlement agreement?

No two settlement agreements are exactly alike. They will all vary according to the circumstances of the employment relationship being addressed. There are, however, key terms contained within virtually all settlement agreements which are usually drafted by the employers solicitor. Of course, one of the most important issues is how much compensation will be paid to the employee. Other matters affecting the employee that are likely to be included are restrictions on future employment, confidentiality requirements and an agreement not to make negative statements about the employer.

Settlement agreements typically contain assurances given by the employee and employer including the reference the employer will give on behalf of the employee and the settlement of any claims the employer has against the employee.

What is required for a valid settlement agreement?

In order to be valid and binding, a settlement agreement must meet certain statutorily-defined requirements. It must be in writing and it is only valid if the employee received legal advice from a qualified adviser before signing the agreement. The adviser, who must be identified in the agreement, must carry professional indemnity insurance which usually restricts it to solicitors and trained trade union officials. The agreement must contain a statement declaring that all of the legal requirements have been met.

Who benefits from a settlement agreement?

The main goal of a settlement agreement is to provide both parties with certainty and finality. It guarantees the employee a specific amount of severance pay. In return, the employee promises not to bring any legal claims against the employer. It is a clean break that provides closure for the employee and the employer alike.

Is the employee obligated to sign?

The employee is not required to sign the document. By not signing, the employee retains their right to bring a legal claim against the employer to the Employment Tribunal.

How much does it cost to obtain legal advice?

It is standard for the employer to pay for the employee to obtain the requisite legal advice.

When will I receive my severance pay?

The terms will specify the payment date, which is typically within 7 or 14 days of signature.

Is the compensation taxed?

The amount of severance pay received will determine whether or not you have to pay any taxes. The first £30,000 of compensation is not taxed, but any amount exceeding £30,000 is taxed in the normal way.

Why should I seek the advice of a solicitor?

A qualified solicitor is one choice the employee has when selecting an adviser. The benefits of working with a settlement agreement solicitor include their full and complete understanding of all the legalese stuffed into these agreements. Solicitors also have experience with the various employment claims which may be available to you. They can advise you on whether any of those claims are worth pursuing instead of just signing the agreement.

In many cases, signing the settlement agreement will be the employee's most beneficial option. Because of the finality of these agreements, however, it is always wise to receive advice from a qualified solicitor as to the suitability of the terms.

Practical Effects

Your settlement agreement solicitor will inevitably advise you that the single most important factor for employees to keep in mind is that signing the contract causes you to lose your ability to bring a claim against your employer in the Employment Tribunal or any other court. However, sometimes the contractual arrangements only cover certain topics, such as redundancy. If the arrangement covers limited topics, then while you're not able to bring a claim based on redundancy, you could still bring claims on other matters, such as discrimination.

It is not uncommon for an employer to try to get an employee to sign a "catch all" agreement, which amounts to the employee signing away all of his future rights to bring claims. Questions as to the legality of these all-encompassing agreements remain. Most settlement agreement lawyers will advise both employers and employees to avoid this type of clause. An employee is not required to sign if he is not satisfied with its terms. The offer can be rejected and the draft agreement will be returned to the employer for further negotiation. When deciding whether to accept the first draft of an agreement, employees should keep in mind that an employer's initial offer is likely to include more favourable terms than required by law. If a disagreement arises, the employer may decide to resort to the minimum sum prescribed by statute, which could very well be less than what was previously offered.

Legal Conditions

Settlement agreements were originally introduced by legislation whereby it was intended that such an arrangement will legally bind both parties in full and final settlement of an employment dispute when it became apparent that ACAS was reluctant to become involved in the settlement of any claim where there had been no prior application to an Employment Tribunal. Settlement Agreement law dictates that certain conditions must be met in order that such arrangements are valid:-

• The terms must be in writing and relate to the complaint in question.
• The claimant must receive independent advice from one of the following:
  • A qualified solicitor or barrister
  • An appropriately qualified and authorised trade union representative
  • An advice centre worker who is appropriately certified and authorised
  • A fellow of the Institute of Legal Executives supervised and employed by a solicitor

Settlement Agreement Terms

The use of a settlement agreement is the only mechanism by which a legally binding contract can be made without initiating proceedings in the Employment Tribunal. In addition to the employees agreement to give up their legal claims in exchange for a financial settlement, most settlement agreements also cover:

• tax indemnity clause, stating that the employee is responsible for any taxes on the compensation paid
• matters that are to be kept confidential
• a list of statutes under which the employee is agreeing not to bring a claim
• assurances given by the employer
• assurances given by the employee
• post-termination restrictions on future employment

Benefits

A settlement agreement provides certainty. There are no guarantees when you bring a claim to an Employment Tribunal. You do not know how much compensation you will be awarded or even if your claim will be successful. A settlement agreement, on the other hand, ensures that you will receive a set amount of money by a certain date.

Negotiation

After consideration of the terms there is no requirement for an employee to sign if that person is not happy with what has been offered and the matter can be referred back to the employer for further consideration however it must be borne in mind that many employers offer more favourable terms than they are required to do at law and in the event of a disagreement may prefer to rely on the statutory minimum sum which could be less than that previously offered in the proposed settlement / settlement agreement.

Enhanced Compensation

A settlement agreement usually ensures that an employee receives more than they might be otherwise be entitled to contractually or by statute upon termination of the employment. This enhanced compensation is offered by the employer to buy certainty to ensure that their financial liability is quantified at an early stage. The employee is usually bound by this agreement and thus prevented from taking any further legal action against the employer.

Settlement Agreement Solicitor

Our settlement agreement solicitors provide representation for all matters related to employment law in the United Kingdom. They are qualified to give advice on settlement agreements, formerly known as settlement agreements to employees which is a legal requirement, contained in statute, prior to the execution of any such arrangement. Most employers will pay either in full or in part for the legal costs associated with an employee taking settlement / settlement agreement advice from a lawyer.