How to assess a settlement agreement

What is a settlement agreement?

Before we go into how to assess a settlement agreement, let’s begin with what a settlement agreement is. A settlement agreement, which used to be called a compromise agreement, is a legally binding document between an employer and employee. Once a settlement agreement has been signed and has met all the legal criteria, an employee will no longer be able to make any type of claim, listed in the agreement, against the employer.

A settlement agreement may be given to an employee for a variety of reasons; some of which include:

• Redundancy
• As compensation for being treated badly at work and to avoid an employment tribunal
• To agree non-financial payments when employment is terminated
• To resolve a dispute at work
• Tax efficiency (the first £30,000 of a settlement agreement payment is tax free)

What would constitute a fair settlement will depend on the reasons behind the why your employer has presented you with a settlement agreement.

What makes a settlement agreement legally binding?

For a settlement agreement to be legally binding, it must meet the following criteria:

• It must be in writing
• It must relate to a particular proceeding(s) or complaint(s)
• It must be signed by the employee
• The employee must have received independent legal advice
• The legal adviser must be identified and insured
• The agreement must state that the requirements regulating the settlement agreement have been satisfied

If the settlement agreement does not meet one or more of the above, then it will not be legally binding. It is in the interest of both the employer and employee to ensure the settlement agreement is dealt with in the correct manner.

Can an employee request a settlement agreement?

An employee can request a settlement agreement; however, an employer has no obligation to give their employee a settlement agreement if one is requested. Typically, they are normally offered by the employer to the employee to end an employment relationship, to resolve disputes or change the terms and conditions of employment.

Settlement agreement negotiations

You have the right to negotiate a settlement agreement and the things you should consider negotiating include:

Financial compensation - the financial compensation being offered should reflect the seriousness of the issues that have led to the settlement agreement. Also, if there are restrictive covenants that that mean you can’t seek or start a new job straight away, or could cause problems in finding a new job, then you should be compensated adequately for this. Your financial compensation may also include any holiday payment, payment in lieu of notice, bonus payments, share schemes and compensation for any other benefits lost.

Non-financial compensation - a settlement agreement can include non-financial compensation, such as a reference, garden leave and keeping company property, such as a car or a phone.

Confidential clauses - many settlement agreements include confidentiality clauses. This generally means that your employer cannot disparage you and you cannot disparage your employer; some confidentiality clauses may restrict you from revealing the contents of your settlement agreement. If you or the employer ignore the confidentiality clause, this is considered a breach of the settlement agreement and this may mean the ‘injured party’ may be able bring a breach of contact claim. When assessing your settlement agreement’s confidentiality clause, ensure you are not restricted to an unreasonable extent. There should be a list of exceptions with whom you can discuss your settlement with; for example, your partner/spouse or professional advisors. It is also important that you do not agree to waive your rights to make what is known as a “protected disclosure” (e.g. reporting illegal activity) as this could breach whistle-blowing legislation.

Restrictive covenants - depending on your role and seniority, your settlement agreement may include restrictive covenants. Generally, this means you will not be able to compete commercially with your former employer for a certain period of time after your employment ends. It is worth noting that restrictive covenants are not always enforceable, as they can act as a restraint of trade, which means they are against public policy. Our expert employment solicitors can help you determine whether or not a restrictive covenant is fair, and whether you are receiving sufficient compensation for it.

Our settlement agreement solicitors can help you negotiate the best possible agreement for your situation. Contact us today on 0161 696 6170.