Wilson Browne - Settlement Agreements

Most of us will know a settlement agreement as a legal contract between an employer and employee which settles a claim the employee has made against their employer, typically used in conjunction with the termination of the employment.

There are however occasions when employment will continue but the agreement is used to settle any ongoing disputes between the employer and employee.

What can and should be included in a Settlement Agreement? 

Settlement Agreements will contain several standard terms including;
  • Payment for the termination to be provided by the employer to the employee after they have agreed to terminate their contract. Amounts of settlements vary based on a range of factors including performance to date by the employee, number of years of service and current salary.
  • Any outstanding payments for salary, commission, bonuses and accrued holiday pay owed to the employee.
  • Usually an employee will agree to drop any past claims against the employer and vice versa. 
  • The employer will often contribute towards any resulting legal costs.
  • A ‘good reference’ can be requested by the employee to aid with future job application but can be denied if the employee has performed poorly. 
  • Up to £30,000 of compensation will be tax free for the employee.
  • A Non-disclosure Agreement or Confidentiality clause as well as a Non-Derogatory clause is usually included to the benefit of both parties.
  • The settlement agreement must be signed by either an official from the Trade Union, a solicitor specialising in this area of law or a member of the Citizens Advice Bureau.

Who can sign a Settlement Agreement?

The agreement is agreed by an employee (current or former) and an employer but can also be entered into by someone who is not employed by a company. An example of this is could be an individual who feels they were discriminated against during a job interview, however, a Settlement Agreement is for individuals and not groups of people.

How much can I get as a Settlement Agreement?

The sum of compensation for a settlement agreement can vary from case to case but there will usually be a clause which stipulates your employer will pay your legal fees.

This contribution amount is usually capped at an amount between £250-£500 plus VAT but if you are both happy with the agreement it is not likely that your fees will exceed this. If in doubt, you should seek advice from a Solicitor as to the likely fee estimate.

The compensation amount itself can be based on a variety of factors, some of which include:
  • Salary & Benefits- the agreement will typically ensure the employee will receive all the normal salary and any benefits up until the agreed termination date.
  • Holiday Days Accumulated- Any days of holiday the employee has accrued and not used during employment must be paid for.
  • Redundancy Payment- If the settlement agreement is in place as a result of redundancy, the employee will also be entitled to redundancy pay. This can vary depending on length of service, level within the organisation and current earnings.
  • Payment instead of a Notice Period- If employment is being terminated via the settlement agreement there may not be a standard ‘notice period’. In this instance an employer should pay for the amount that would have been earned during this period.
  • Termination Payment- This is a payment an employer can provide an employee as an incentive to sign the settlement agreement. 
  • Bonuses - Any bonuses the employee was entitled to for staying employed until a specified date need to be paid. 
  • Legal Costs- The employer is often required to contribute towards the fees incurred by the employee seeking legal advice surrounding the settlement.
  • Restrictions Payment- The employer may stipulate restrictions in the settlement such as not setting up a competing business within a specified distance or time or working for a competitor and in this instance, they will often provide an additional payment. 

Is it binding? What happens if a Settlement Agreement is breached?

A Settlement Agreement is a legally binding contract and once it has been signed, if either party breaches the terms, the wronged party are entitled to raise a claim in court.

In some settlement agreements there will be an enforceable repayment clause which allows employers to retrieve some, if not all, of the money topaid to their employee if the employee breaches the terms.

This is likely to include any legal fees the employer was required to pay as a result of the breach.

If you need advice on a Settlement Agreement and to ensure that you remain within the restrictions of this agreement, then you should seek professional legal advice today.