Employee Settlement Agreements

We have often been approached by clients, particularly, during the Covid 19 lockdown, regarding “settlement agreements” that are being offered by their employers.

Generally, a settlement agreement is an arrangement where the employer and employee mutually agree to settle any pending or potential dispute between them. Settlement agreements are also given to employees who are being terminated or their positions are being made redundant.  In simple terms, a settlement agreement is a mutual arrangement between the employer and employee to bury their disputes usually against payment of certain compensation to the employee.

However, as simple as that may sound, most employees go through a stressful time when the “settlement” talks are going on between the employer and employee. We are experienced in advising clients on settlement agreements and we try and ensure that our clients are explained about the settlement agreement and its terms and conditions in simple and lucid language which is easy for the lay client to understand.

In this article we have tried to explain some of the common features of a standard settlement agreement.

Without prejudice subject to contract

Most settlement agreements usually start with the heading “without prejudice subject to contract”. This phrase means that whatever is being discussed and negotiated between the employer and employee is without prejudice to their respective rights available to them under law. So, whatever is proposed during a negotiation from either side shall not affect their available legal rights, should, the dispute proceed to a Tribunal / Court. 

Usually, a settlement agreement contains various financial proposals offered by the employer to the employee, however, such proposals would only become binding only when the negotiations crystalise into a “settlement contract” signed by the parties. Therefore, subject to contract means that proposals are subject to execution of a valid contract.

Settlement and waiver of claims

The primary objective of a settlement agreement is to settle all disputes arising out of an employer and employee relationship. Therefore, employers try to ensure that the employee gives up all their rights to pursue any existing or potential dispute pertaining to employment. The employer offers settlement (usually in form of money) to the employee in lieu of withdrawing any pending dispute or waiving his / her right to any potential dispute even if that is not in knowledge of the employee at the time of execution of the settlement agreement. The monetary compensation is offered by the employer as an incentive for the employee to settle and waive away all existing and future claims.

However, the waiver does not act as a blanket waiver, and it is imperative that the settlement agreement clearly mentions the laws or the nature of proceedings that are being waived by the employee. Generally, employers ensure that the statutes and the nature of proceedings are clearly set out in the settlement agreement.

The exception to waiver of future disputes is available for any claim by the employee to enforce the settlement agreement, personal injury or entitlement of pension.

Sums paid through a settlement agreement.

The payments or the quantum of payments depend on the nature of the dispute being settled by the parties. Generally, payments are done for notice period pay, statutory payment for redundancy, unpaid salary and leaves and finally the compensation for settling and waiving rights to future disputes.

If there are statutory guidelines set out for calculating these payments, then the employer cannot offer lower than what is set out in the statute. However, in cases of ad – hoc payments the employer follows their own HR policy.

Generally, the compensations are free from income tax or N.I upto a limit of £30,000.00. Thereafter, it is the duty of the employee to ensure that he / she pays the proper income tax and N.I contribution for the remaining balance. Usually, the employer do not pay the tax for the compensation unless agreed otherwise.

Post termination restrictions and confidentiality

Majority of the employers would want to protect the intellectual knowledge that an outgoing employee takes with himself / herself. Therefore, it is common to have reasonable restrictions set out in the settlement agreement which restricts the outgoing employee to either engage with the existing clients of the employers or non-solicitation of existing employee of the employer or non-divulgence of confidential information or knowhow. At times, the outgoing employee is restricted from working for a competition for a substantial period.

The restrictions are usually reasonable, and the duration is usually between 6 to 12 months. However, longer durations of restrictions are not uncommon, however, the employer ensures greater financial compensation in the event of longer restrictions.

While, the confidentiality clause is binding on the employee, however, the employee shall not be bound to confidentiality when he / she is required to make disclosures as per law. This would mean that the employer can breach the confidentiality clause when directed by a court of law, before a law enforcement or other forums where the employee is mandated to make disclosures as per law.

Legal advice

A settlement agreement cannot be executed unless the outgoing employee has been given the opportunity to take legal advice from an authorized person on the settlement agreement. The employer usually pays reasonable legal fees to the employee to cover the costs of advice. This is a mandatory requirement, and the advisor has to give a certificate to the effect that he / she had indeed advised the outgoing employee on the settlement agreement.

Is it mandatory to settle?

An employee is usually given 10 days to consider the settlement agreement and take the required legal advice. However, there is no compulsion for the employee to accept a settlement. However, non – acceptance may lead to termination by the employer or prolonged legal battle at the employment tribunal which might not be cost effective for the employee. Therefore, a decision on whether to accept or not accept the agreement should be based on the merit of each individual matter.

In this article we have set out some of the important parts of a settlement agreement. However, it is needless to mention that a settlement agreement would depend on the circumstances of a particular employee. A general guideline on settlement agreements are available at the website of “ACAS” and these guidelines have been approved by the Parliament.