Understanding a ‘Settlement Agreement’ and achieving a fair deal between parties

Clive Rich of Lawbite discusses issues that may occur following termination of employment.

Understanding a ‘Settlement Agreement’ and achieving a fair deal between parties

Clive Rich of Lawbite discusses issues that may occur following termination of employment.

In the complex world of employment law, navigating a fair exit with an employee can sometimes be tricky: Even when it’s patently clear that the relationship has run its natural course. Even in these apparently ‘obvious’ circumstances, it is crucial to try and avoid protracted and costly litigation. 

So, it’s vital to find an efficient and effective route that considers both sides’ positions, with the aim of achieving a balanced outcome. This is where ‘Settlement Agreements’ come into play. In this article, I will explain everything you need to know about ‘Settlement Agreements’ and what you should consider before agreeing one with an employee.

What is a ‘Settlement Agreement?

Settlement Agreements’ were previously called ‘Compromise Agreements’, so you may have heard of this legislation before. Explained simply, they are legally binding agreements by which an employer and an employee can terminate an employment relationship on agreed terms. 

The most fundamental aspect of a ‘Settlement Agreement’ is that in return for (usually) a financial package, the employee agrees to end their employment on a specified date without bringing any employment claims against their employer.  

As part of the ‘Settlement Agreement’, it is expected that the two parties will negotiate a ‘deal’ that may include clauses relating to an employee’s notice period – or pay in lieu. This may involve well-known terms such as holiday pay, compensation or ex-gratia payments, pension payments, confidentiality terms, post-termination restrictions, gardening leave, and even a job reference.  

When are they used?

They’re commonly used where there has been a dispute between the two parties, or an employment claim is threatened. They are also used to bring an end to employment by ‘mutual agreement’ or where an employee takes voluntary redundancy with an enhanced financial package.

The benefits of a ‘Settlement Agreement

From an employer’s point of view, the main benefit is to know that a ‘Settlement Agreement’ will bring the matter to a conclusion on agreed terms. Once the Agreement has been signed (subject to a few limited exceptions), the employer knows that the employee can’t bring any future claims or pursue any further grievances.

From an employee’s point of view, although their employment has been terminated, they may recognise there is a benefit to signing an agreement if the financial terms appear to be attractive. They may also acknowledge the security of knowing that the terms are fixed by contract, and that they can move on with their life and career elsewhere.

What protections are there for the employee?

A ‘Settlement Agreement’ is a legally-binding document, which means the employee will be signing away their employment rights. It’s advisable for employees to take independent legal advice before signing a ‘Settlement Agreement.’ This can be attained from a lawyer, or trade union official or an advice centre expert. An employee can’t be coerced into signing an Agreement. But should they choose not to sign, they may miss out on any enhanced financial package in the future.

How to negotiate a fair deal?

Typically, a fair Settlement Agreement includes details by which most employees are entitled to receive by law. This involves:

  • Notice (or pay in lieu);
  • Holiday pay;
  • An amount of money that represents a statutory redundancy payment;
  • A financial sum compensating the employee for signing away their employment rights. This is known as an ‘ex-gratia’ payment which is also described as a compensation payment.

The amount of money paid out in an ‘ex-gratia’ payment depends on a number of factors, such as seniority, status and annual remuneration of the employee. It may also take into account the respective negotiating or bargaining positions of both parties. Much will also depend on the desire of the two parties to get a deal done. It could even reflect the merits of any possible claims which an employee may be contemplating.

Employees sometimes look at the overall package, and compare this to the net pay it represents when broken down across several months. This is often a good starting point from which to build a deal that both parties are happy to sign-up to.

The end!

A ‘Settlement Agreement’ can mutually benefit both parties. Always appoint an experienced lawyer, who specialises in employment law, to draft your ‘Settlement Agreement’. This will help to ensure that both parties receive a fair deal and a suitable package. 

If you require such advice, then contact LawBite to provide the necessary and vital legal support. LawBite offers a free ‘Settlement Agreement’ template for you to use when getting started.

Clive Rich
Clive Rich

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