Settlement agreements: understanding the process

Settlement agreements: understanding the process

An employer wishing to part company with an employee can enter into an agreement whereby the employee will be paid a sum of money in return for agreeing not to pursue any claims in a court or tribunal.

Settlement Agreements, formerly known as Compromise Agreements, are now a commonplace feature at the end of an employment relationship. Indeed, the government appears to have prompted their use by introducing legislation which permits employers to have “protected conversations” meaning evidence of pre-termination negotiations are not admissible in unfair dismissal proceedings.

Although entering into such an agreement might appear to be a straightforward matter, the legal principles can be complex. At the very least, the strict formalities set out in legislation must be complied with if the agreement is to be legally binding. The employee must take independent legal advice as to the terms and effect of the settlement agreement.

A number of issues will fall for consideration such as:

  • How soon will the severance payment be made?
  • Who will be responsible for paying the employee’s legal costs?
  • What happens about the company car, the laptop, the mobile telephone?
  • Is the employee entitled to outstanding holiday pay?
  • Should the employer be obliged to provide a reference?
  • What are the overall tax implications of the deal?

In addition, employers might wish to include provisions which restrict the employee from entering into competitive employment or soliciting customers for a period of time; even if such restrictions are contained in the employee’s contract of employment, the employer might be well-advised to restate them in the severance agreement. Confidentiality of the employer’s information and confidentiality surrounding the agreement often form terms of the agreement.

Cases decided in the appeal courts have led to the law relating to settlement agreements becoming complex and a trap for the unwary. Employers and employees should ensure they seek specialist employment law advice.

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