What is a settlement agreement?
A settlement agreement is a legally binding confidential agreement between an employer and an employee. A settlement agreement is usually coupled with a compensation payment which is given to the employee by the employer, and in return, the employee agrees to waive their employment rights and not to pursue any employment tribunal claims arising from their employment or its termination.
A settlement agreement can also provide additional protection for employers, including reaffirming post-termination restrictions and duties of confidentiality, while preventing employees from making defamatory comments about the business or its management.
When might an employer use a settlement agreement?
There are a range of circumstances when an employer should consider the use of a settlement agreement, for example, an employer may use a settlement agreement when undertaking a disciplinary process, especially if they consider the employee is likely to bring a claim against them.
Another example is where an employer is terminating an employee who has been on long-term sick leave; an employer may choose to exit the employee under cover of a settlement agreement to avoid the risk of the employee claiming against the employer for discrimination.
Settlement agreements are useful in other circumstances too because they offer employers a quick method of terminating employment without having to undertake a long and difficult process. By using a settlement agreement, an employer is also afforded extra protection and peace of mind, knowing that the employee cannot pursue them for any claims arising out of their employment or it's termination (except for claims in respect of accrued pension rights, latent personal injury and enforcement of the settlement agreement itself).
"Without prejudice" - getting it right?
The employer needs to be sure that there is an "existing dispute" before commencing a "without prejudice" discussion and broaching the possibility of a settlement agreement; for clarity, however, a dispute can be instigated by commencing a disciplinary process, for example; if a settlement agreement is offered without having raised concerns about the employee's work performance or conduct previously, the employer can attempt to claim that discussions and related documents are "off the record", but they may not be entitled to treat them as such.
If the employee refuses to engage and the discussions are not truly without prejudice, they may argue the relationship of trust and confidence between the parties has depleted, and their role has become untenable. In this scenario, and if the discussions are not actually "without prejudice" the employee may be able to use discussions and any related documents as evidence in a claim against the employer.
The ACAS guidance on settlement agreements sets out inappropriate behaviour which can occur during settlement agreement negotiations that would entitle an employee to refer to conversations and submit documents as part of an employment tribunal claim.
How much should an employer offer to pay under a settlement agreement?
There is no maximum which should be offered to an employee under a settlement agreement; however, as a minimum, the employee should be offered all of their basic contractual entitlements. It is also recommended that an employer offers a tax-free (ex-gratia*) payment to the employee in exchange for them waiving their employment rights, and to encourage them to enter into discussions. *An ex gratia payment is a payment made by an employer where there is no contractual obligation to do so.
Given the legal implications, it is advised that you seek professional legal advice from an employment lawyer before making a settlement offer. For added peace of mind, the settlement agreement should also be professionally drafted.
When should the employee expect to receive the money?
For ex-gratia payments, the employer can set the timescale for payment. This is usually between 14 and 28 days of the settlement agreement being signed by the employee and their adviser. However, it can be either longer or shorter than this if necessary. This is one aspect of the agreement which employers and employees may negotiate and find a middle ground.
In terms of contractual payments that are due (for example salary, holiday and notice pay), employers may wish to continue making payments through the payroll on the usual payroll date. If the employee is receiving these payments in lieu, then the employer can either run them through payroll at the usual time or pay them alongside the ex-gratia payment, it is entirely in the employer's discretion.
Who pays for the legal advice an employee has to take on a settlement agreement?
Generally, an employer will make a contribution towards legal fees under the terms of the settlement agreement. The average contribution is in the region of £350 - £500 plus VAT depending on the complexity of the agreement. If the agreement covers shares, expect to pay more towards the employee's legal fees.
If the employer requires the employee to sign a reaffirmation letter (to obtain advice on the agreement twice because the termination date is a long way into the future and thus potential claims can theoretically arise between signing the agreement and the termination date), a further fee will be incurred in respect of the reaffirmation. This fee is usually in the region of £150 plus VAT.
What if an employee refuses to sign the settlement agreement?
If an employee refuses to sign a settlement agreement, the employer should continue with whatever "open" process they have commenced, i.e. its disciplinary, redundancy or capability process.
If there was a dispute and the without prejudice rules apply, the employee's refusal will not detriment the employer, as the employee will not be able to rely on these discussions as part of any tribunal claim. In the alternative, if without prejudice protection is not applicable, either because there was no dispute or the employer put undue pressure on the employee to sign the settlement agreement during the negotiations, the employee may use the settlement agreement and all associated correspondence to support a claim against the employer.
It is therefore advised that you seek legal advice from a qualified employment lawyer if you are considering commencing settlement negotiations and offering an employee a settlement agreement.
The article was originally written for Law Donut.