What is a Settlement Agreement?

A settlement agreement is a legally binding document entered into between employer and employee when a period of employment ends.  In this section we cover all of the main points surrounding settlement agreements.  What is a settlement agreement?  How is a settlement agreement signed?  How much does a settlement agreement cost?  We have tried to answer all of your questions around settlement agreements!  And if we have not answered your questions – please get in touch with one of our expert settlement agreement solicitors! You can email us at info@qlaw.co.uk or call us 03300 020 365. 

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Settlement Agreement FAQs

A settlement agreement is a legally binding agreement between employer and employee used when employment comes to an end and which protects both employer and employee from future action being brought by the other party. It provides a ‘clean break’. It is used in all sorts of situations including where there may be potential claims relating to: wrongful dismissal; redundancy; discrimination in the workplace; grievance procedures; disciplinary processes; bullying at work; sexual discrimination; misconduct; gross misconduct; and performance issues.

A settlement agreement can cover all manner of situations relating to your loss of office/losing your job. They used to be called compromise agreements, and these were often used where there were question marks over an employee – ie a ‘problem employee’. Now, settlement agreements are very much run of the mill, and simply considered good practice to protect both employee and employer when employment ends. Generally, they are used where there may be some potential for future dispute around matters such as: conduct; gross misconduct; redundancy; bullying at work; sexual or age discrimination; performance issues; grievance procedures; and disciplinary processes.

You are under no legal obligation to accept a settlement agreement from your employer as an employee. However, one of the purposes of a settlement agreement is that the employer pays for you (as employee) to receive independent legal advice of your own from an employment solicitor that has nothing to do with them. This is a legal requirement for the settlement agreement to be binding. It is intended to provide employees with a safety net of independent employment law advice. If you refuse a settlement agreement, you will also forego the opportunity to have that ‘free legal advice’.

Employers use settlement agreements for a number of reasons around issues of employment law. In short, they are used to protect both employee and employer, not least because to be binding on both parties the employee must receive independent employment law advice from an employment law solicitor that is independent of the employer. And, critically, the employer must pay for the independent employment law advice given by that solicitor to the employee. With that and other requirements met, a settlement agreement will bind both parties and remove the opportunity for future claims. It therefore provides a ‘clean break’.

A settlement agreement is the legal document that binds an employer and employee to a ‘clean break’ in employment law – ie it removes the opportunity for employer or employee to sue the other in the future. So, the answer is no – a settlement agreement is not the same as a dismissal. However, settlement agreements are used by employers and their HR advisors in many situations where there has been a ‘loss of office’ and this might include where there has been a dismissal around issues like: redundancy; unfair dismissal; constructive dismissal; discrimination; performance issues; grievance process; disciplinary process; misconduct and gross misconduct. So, to that end, dismissal and a settlement agreement are closely linked!

No! A settlement agreement is not the same as redundancy. Redundancy is a reason for you losing your job. A settlement agreement is simply the ‘paperwork’ around that loss of job. You may well be asked to sign a settlement agreement by your employer if you are made redundant. Redundancy is a situation whereby the job you currently do is deemed to no longer exist. Your employer may be liable to make a payment as compensation of that loss of job. A settlement agreement is a legally binding agreement between employer and employee which creates a ‘clean break’ between them. Settlement agreements are used in all sorts of situations – not just redundancy.

Although there is a general format that settlement agreements will follow, as a matter of employment law you can technically have your settlement agreement cover all manner of things. Before you are provided with a settlement agreement, it is likely that your employer’s HR team or employment law solicitors will have a process of consultation with you during which the terms of your settlement agreement are likely to be agreed ahead of the settlement agreement being signed off by you and your employer. The sorts of things you can have included in your settlement agreement are likely to include: have I been offered a reference? Will my settlement agreement legal fees be paid? How much will I be paid after my settlement agreement? What tax is payable on my settlement agreement? Are there any restrictive covenants in my settlement agreement? Will I be paid my bonus in my settlement agreement? What benefits will continue after my settlement agreement? What will be my termination date in my settlement agreement?

On average, solicitors charge around £500 (+VAT) to advise on settlement agreements. This fee payable to your own employment law solicitor will normally be paid by your employer. Fees for advising on settlement agreements will vary depending on (for example) why you have lost your job. If it turns out that you may be losing your job unlawfully, your employment law solicitor will tell you this, and if further work is needed in relation to your redundancy/ dismissal/ misconduct/ etc, they will advise you what those solicitor’s costs would be if you decided you wanted to challenge your employer in relation to your loss of job.

Employment law solicitors will generally have fees for advising an employee on settlement agreements from around £250 (+VAT). More typically, fees for advising on a settlement agreement will average around £500 (+VAT). If you are an employee needing advice on a settlement agreement, your employer should pay all or most of the costs charged by your own employment law solicitor. This will be a term of the settlement agreement (ie that your employer will pay the costs of your own employment law solicitor).

Yes, an employer must pay all (or a reasonable proportion of) the employees fees incurred in obtaining independent legal advice in relation to their settlement agreement. If the employer refuses to meet the legal fees, it potentially renders the entire settlement agreement void. For the settlement agreement to be binding on both employer and employee, the employee must taken independent legal advice, and the employer must pay those legal fees.

How long does it take to negotiate a settlement agreement is unfortunately rather like asking how long is piece of string. If the reason for you losing your job is simple (for example redundancy) and you have not been discriminated against for any reason then the whole process can be over in a matter of a few weeks. Where a settlement agreement tends to take longer is where you lost your job for reasons more complicated, and in particular if your employment law solicitor raises queries with your employer in relation to the terms of your settlement agreement. The queries your settlement agreement solicitors may raise will include things such as: bullying at work; payments owing following dismissal; pension contributions; bonus payments; tax on your settlement agreement payment; and perhaps if you have been discriminated against – for example during a round of redundancy.

The simple answer to this question is yes, depending on certain things! It is likely that any payment made to you by your employer under the terms of your settlement agreement will include various elements, perhaps including: accrued holiday; garden leave payments; bonus payments; and compensation. The first £30,000 of any compensation can generally be paid free of income tax in the UK. However, that £30,000 compensation under your settlement agreement must not include any element of contractual payments for example payments in lieu of notice – know as PILON payments. If in doubt about the tax status of any payments made to you by your employer under a settlement agreement you should seek independent tax advice.

Yes, you do need an employment law solicitor for a settlement agreement! It is part of the legal requirements about executing settlement agreements that the employee receives legal advice from an independent employment law solicitor. The solicitors fee for advising the employee will normally be paid by the employer. Without that independent advice being given (with cost met by the employer), the settlement agreement will not be legally binding on the employer and employee.

An employee must take independent legal advice on the content of their settlement agreement in order for it to be legally binding on both employer and employee. If the employee does not take that independent legal advice (and they should do so from a specialist employment law solicitor), the settlement agreement will not become legally binding under the legal framework surrounding settlement agreements. This provision was built into the law to make sure that employers do not wrongly gain protection from future action brought by employees. The need to have received advice from an employment lawyer provides the employee who is receiving the settlement agreement with a ‘safety net’ and hopefully avoids rogue employers misusing settlement agreements to avoid future legal action in an employment tribunal (for example).

A settlement agreement gives certainty to both employer and employee when a job position comes to an end. It is a legally binding contract that means both employer and employee agree to a clean break, and can not thereafter being legal action (employment tribunal). As well as that clean break and certainty that a settlement agreement gives, it also provides employees with the knowledge that they must receive independent legal advice which must be paid for by the employer. This is designed to avoid rogue employers taking advantage of vulnerable employees. The sorts of areas that a settlement agreement will give certainty will include both the payments and terms being offered, and also in excluding future claims. So these employment law issues might include all manner of things including: payment in lieu of notice (PILON); holiday and sick pay; bonus payments; pension contributions; grievance process; disciplinary process; discrimination; performance; dismissal; and redundancy.

The point of a settlement agreement is to give certainty to both the employer and employee. It is a requirement of law that where a settlement agreement is signed the employee receives independent legal advice on the terms of the settlement agreement and the circumstances surrounding the ending of their employment. The employer must pay for that independent legal advice. Once a settlement agreement is in place and deemed legally valid, it provides a ‘clean break’ and means legal action in the future can not be taken (employment tribunal).

The payments that you receive under a settlement agreement will depend upon your particular circumstances, and of course why your employment is coming to an end. Your employment contract is likely to define what payments fall due for example if you are made redundant. The other things your contract of employment should define are things like holiday pay due, payments in lieu of notice (known as PILON), and bonus payments. Where payments may be less predictable under a settlement agreement may be where your ‘loss of office’ (ie why you have lost your job) is questionable – particularly if your employer has treated you badly or even unlawfully (for example if they have bullied you). In those circumstances, employers may wish to ‘pay off’ employees with compensation to avoid future claims being brought in an employment tribunal.

Your employer will prepare the settlement agreement (or their employment solicitors). There is likely to be a period of ‘consultation’ with the employee ahead of the actual settlement agreement being drafted and presented to you. During that period of consultation, the main terms of the settlement agreement are likely to be agreed between employer and employee.

Yes, your employer can withdraw a Settlement Agreement at any point up to it being signed by them.

Typically, the employee will receive independent legal advice on the terms of the settlement agreement. The employee and their solicitor will both sign the settlement agreement. It will then go to the employer who will sign. Then, and only then, is the settlement agreement legally binding.

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