Reasons to choose Wilson Browne
With the governments furlough job retention scheme coming to an end it has been impossible for most businesses to avoid making redundancies.
A settlement agreement may be offered by an employer when making redundancies as a tool to protect them against any potential claims that the employee may have.
What does this mean for the employee? We explain the process of settlement agreements for employees and how we can help.
What is a Settlement Agreement?
A Settlement Agreement (formerly known as a compromise agreement) is a legally binding agreement between an employer and an employee where you (the employee) agree to settle your potential claims: in return, the employer will generally agree to pay financial compensation.
Settlement Agreements are typically associated with the ending of someone’s employment and are issued either shortly before or after the employment has ended (but they can also be used when employment is going to continue).
Normally, the employee agrees not to pursue a potential claim against their employer or former employer, in return for compensation. To be binding, the employee must get independent legal advice before signing. Check out our detailed guide on settlement agreements.
What is it used for?
As previously mentioned an employer may use a settlement agreement as a tool to protect themselves from a claim being made against them. You can make a claim against the business/your employer under both the contract of employment (e.g. a wages claim) and under statute (e.g. discrimination or unfair dismissal claims).
Typically claims can arise in the following broad circumstances: on recruitment; during employment; or when their employment is terminated. Accordingly, settlement agreements can be used at any point during the employment (or potential employment) relationship.
As a settlement requires an employee to obtain legal advice to be legally binding it is normal for the employer to contribute a sum of money which is typically enough to cover the cost of a typical Settlement Agreement, however there is no legal requirement.
Are Settlement Agreements legally binding?
For a Settlement Agreement to be legally binding, certain conditions must be met, these include:
- The Settlement Agreement must be in writing;
- It must relate to a particular complaint or particular proceedings;
- The employee must have received legal advice from a relevant independent adviser (for example, a qualified lawyer or union official) on:
- the terms and effect of the proposed agreement; and
- its effect on their ability to pursue any rights before an employment tribunal
- The independent adviser must have a current contract of insurance (or professional indemnity insurance) covering the risk of a claim against them by the employee for the advice;
- The employee’s adviser must be identified in the Agreement; and
- The agreement must state that the conditions regulating settlement agreements have been satisfied.
What does a Settlement Agreement include?
The contents of a Settlement Agreement are mainly at the discretion of the business and subject to negotiation with the employee involved. Examples of common clauses include:
- Compensation for loss of employment.
- Contribution to the employee’s legal fees.
- A waiver of claims by the employee, including a warranty that the claims listed are the only claims which the employee has against the business.
- Re-assertion or modification of existing restrictive covenants or inclusion of new restrictive covenants.
- Re-assertion or modification of existing confidential information obligations or inclusion of new confidential information obligations.
- An Indemnity from an employee concerning tax and national insurance contributions.
- Sometimes the Settlement Agreement will include other things such as an agreed reference.
Some statutory claims cannot be settled by entering into a Settlement Agreement, such as some types of Personal injury claims; Pension claims; and claims following the transfer of a business.
What is the risk to the employee?
The only real risk is that you use a solicitor or legal adviser who doesn’t make you fully aware of what you may be “signing away” in return for entering into the agreement. Part of our role is to ensure you are fully aware of what you will be getting and what you may be giving-up