What is an employment settlement agreement?
An employment settlement agreement is a legally binding agreement in writing between an employer and its employee. It sets out the terms and conditions of a settlement reached in relation to a dispute between those two parties. It will usually be entered into on the termination of an employee’s employment, although not always. It might also be used to settle a dispute with an employee who then continues to work for the same employer.
Why is it useful?
For an employer, a settlement agreement provides an alternative solution to managing out an employee for poor performance. For an employee, it provides a way of settling a claim against their employer such as unfair dismissal, constructive dismissal, discrimination or breach of their employment contract.
The agreement will settle any specific claims between an employer and employee for an agreed amount. This waiver of claims can provide a clean break for both parties and avoid the uncertainties of litigation in an employment tribunal or court. As well as avoiding that stressful process, it can save both sides time and costs.
The terms of an employment settlement agreement will remain confidential. That enables an employer to avoid any potential damage to its reputation and gives an employee a better chance of quickly finding a new job.
Legal requirement for employee to obtain independent legal advice
Under section 203 of the Employment Rights Act 1996, it is mandatory for an employee to obtain independent advice before entering into an employment settlement agreement. That’s because an employee is giving away their rights to file almost all claims against their employer in an employment tribunal or in court. An independent legal adviser needs to have explained to the employee the terms and effect of the proposed settlement agreement and its effect of the employee’s ability to file a claim.
Whilst an employer is not under any legal obligation to do so, it will usually contribute £500 plus VAT towards its employee’s legal costs to ensure that independent advice is obtained.
What terms should be included in an employment settlement agreement?
Key terms include a waiver of claims and the amount of compensation to be paid to an employee in return for waiving those claims. There might be additional termination payments such as notice pay, statutory and contractual redundancy pay, payments in lieu of holiday, an accrued bonus and payment in respect of shares in the company.
An employer is not required to provide a reference. It’s a good idea to negotiate the terms of an agreed reference and include that in the agreement though.
If an employee is more senior, their employment contract might contain restrictive covenants. These prevent an employee from working for a business competitor for up to 12 months after the termination of their employment. They also commonly prevent that employee from soliciting clients and poaching staff. Restrictive covenants can make it much harder to obtain a new job. It’s important to understand how they operate and, depending on each case, seek to negotiate a workable compromise.
How long does an employee have to consider a settlement agreement?
Acas recommends that an employee should be given 10 days to consider a settlement agreement before signing it. This is non-binding guidance and not a legal requirement, but it is likely to be considered as persuasive by an employment tribunal or court.
Is it compulsory to sign a settlement agreement?
No, neither the employer nor the employee is under any obligation to sign the agreement. It’s important to read the agreement carefully and understand what is being offered before deciding to accept the deal on the table, negotiate it or reject it and proceed to an employment tribunal or court. You should consider whether your expectations are realistic and what the alternative outcomes might be if an agreement is not reached.
In addition to understanding the terms and effect of a settlement agreement, an experienced employment solicitor can advise you on whether the amount of a settlement is reasonable, the merits of your case and what other options are available to you.