Settlement Agreements 101 - Where to start?

What is a settlement agreement?

Sometimes referred to as “compromise” or “severance” agreements, settlement agreements are legally binding agreements that are entered into between an employer and an employee as a means of settling potential employment claims and also but not always terminating the employment relationship.

In order to be considered legally binding on the parties, settlement agreements must satisfy certain legislative requirements.  For instance, if the employee does not receive independent advice from a relevant adviser prior to the signing of the agreement, the agreement will not be legally binding.  Under the legislative requirements, a relevant independent adviser includes (among others) a qualified solicitor.

We have created a short video to address some of the common questions that arise in relation to settlement agreements.

I have been offered a settlement agreement – what now?

Settlement agreements can arise in a variety of different situations, and they do not necessarily indicate any wrongdoing or breakdown in the relationship between the employer and the employee.

Parties to a proposed settlement agreement should be afforded a reasonable time period in which to consider the agreement and its terms.  In their Code of Practice in relation to settlement agreements, the Advisory, Conciliation and Arbitration Service (“ACAS”) recommend that as a general rule, at least 10 calendar days should be afforded to employees once they receive a written proposal from their employer.

Where an individual receives a settlement agreement (or preferably when they are alerted to the fact that they are due to receive it shortly), they should not delay in engaging a solicitor (or other relevant adviser) to review the terms of the agreement as and when it is possible to do so.

Legislation dictates that certain “improper” behaviour in relation to settlement agreements and discussions/negotiations is prohibited.  Improper behaviour includes, but is not limited, behaviour such as victimisation, discrimination, putting any undue pressure on a party, and also not providing a reasonable time for consideration of the agreement and its terms.

Why it is important to obtain proper advice?

Whilst it is of course a legal requirement that the employee takes advice from a relevant independent adviser on the terms of the agreement, it is equally as important (if not more important) that the advice provided is adequate and identifies any issues of concern or points that may prejudice the employee.  Settlement agreements by their very nature potentially afford far greater benefits to the employer than they do to the employee upon signature.  This imbalance is largely caused as a result of the employee agreeing to waive any claims (or potential claims) as mentioned above.  Accordingly, it is crucial that appropriate advice is provided to the employee as to the terms and significance of signing in order to fully evaluate the potential of any claims the employee may have.

There is certainly no “one size fits all” approach when it comes to receiving advice on their terms.  Each agreement will be (or at least should be) tailored so as to be specific to the particular facts surrounding the termination of employment, and the claims that are being waived.  The relevant adviser should be experienced in identifying those matters that are important to the particular employee (for example obtaining a reference from the employer), and also in highlighting any significant matters to the employee as required.

Who covers the cost of legal advice?

Generally speaking, an employer will agree to make a contribution towards the reasonable costs of the employee in obtaining independent advice on the terms of the agreement.  In circumstances where the settlement agreement and its terms have been agreed between the parties in advance of the written proposal being made to the employee, it may be that the employer contribution towards costs is such that the employee is not out of pocket for any costs whatsoever in relation to the agreement.  However, where it is anticipated that protracted negotiations/discussion are likely to take place on particular terms of the agreement, the employer contribution towards costs may fall short of the cost required.  An open and frank discussion in respect of costs at the outset will identify whether the employee is likely to incur any cost of their own for the independent advice.

One thing to be aware of here, is that in a situation whereby the employee has engaged a relevant adviser to review the terms of the agreement and advise accordingly, should a settlement not be reached (and therefore the settlement agreement not signed), the employer is almost certainly unlikely to contribute towards the employee’s costs.  Accordingly, the employee should be alive to the real possibility that where the agreement is not signed, they will be solely responsible for the costs of the relevant adviser.

How long does the process usually take?

This is generally dictated by the employer, and can be influenced by a variety of factors, including but not limited the proposed termination date and whether any notice period is to be worked (or any period to be spent on gardening leave).  Where the employee is required to either work their notice, or required to remain on gardening leave for the duration of such notice period, it is likely that the settlement agreement will be signed twice – once at the time the agreement is posed and agreed, and a second time closer to or on the actual termination date.  Where the settlement agreement is structured like this, the process will of course take longer to conclude.  In such circumstances, the relevant independent adviser will need to be involved for both signings.

Where the settlement agreement does not involve such a structure, for example where the employee is being paid “in lieu of notice” (often referred to as “PILON”).  In these circumstances, it is likely that the employer will be keen to conclude matters as quickly as possible and have the agreement signed.

What can I expect from the negotiations?

Negotiation on the terms of the settlement agreement will of course vary from case to case, and will be dependent on the circumstance.  Where the agreement arises as a result of a mutual understanding between the parties that a settlement agreement represents the most appropriate means to terminate the relationship in the circumstances, negotiations are likely (though of course not guaranteed) to be less adversarial or contentious.  This does not mean that one party will get everything that it requests.  There will usually be a degree of compromise during the natural course of negotiations.

In contrast, where there has been a breakdown of the employment relationship (perhaps due to a breach of process or a breach of trust and confidence), there is likely to be a far more restricted and adversarial negotiation between the parties.  Where this is the case, negotiation will likely take a very different route than it would in circumstances where the parties have come to an amicable arrangement.

Is the settlement agreement the only document to consider?

Whilst the settlement agreement document will be the crucial document in terms of terminating the employment relationship and constituting an effective waiver of claims, it is important to note that other documents may become important.  For example, and from an employee’s point of view, it could be important to consider your contract of employment, particularly where the contract contains restrictive covenants (i.e. post termination restrictions).  Unless negotiated on, any post termination restrictions would continue despite the entering of the settlement agreement.

Get in touch – we are here to help

In the event you have entered into discussions with your employer in respect of a settlement agreement, or you have been offered a settlement agreement in respect of terminating your employment, please get in touch with our specialist and experienced employment team.