What should a settlement agreement include? A quick guide
In this article one of our specialist employment solicitors, Chris Hadrill, answers the question: What should a settlement agreement include?” and explains what employees should look out for in their settlement agreement
- Why use a settlement agreement?
- Why do employers offer settlement agreements?
- What should be included in a settlement agreement?
- What must be included in a settlement agreement?
Why use a settlement agreement?
Settlement agreements are a form of contract which allow employers and employees to settle potential claims that the employee may have arising from their employment or the termination of their employment. They allow both parties to the settlement agreement to clearly understand what their responsibilities, to outline what payments the employee can expect to receive upon termination of their employment, and to confirm that the employee will not pursue litigation against the employer once the settlement agreement has been signed.
Further reading: read our guide on settlement agreements
Why do employers offer settlement agreements?
Employers offer settlement agreements for a variety of reasons, including:
- To settle an existing dispute with an employee (for example, if an employee has raised a complaint that they think that their redundancy is unfair or that they are being discriminated against then the settlement agreement may be intended to limit the employer’s liability in respect of those threatened claims);
- To avoid having to go through a potentially laborious capability process or to avoid dealing with grievances, subject access requests etc.;
- To allow the parties to have a clear and easily-understood outline of exactly what was agreed upon termination; and/or
- Because it may simply be what the particular employer does in such situations
What terms should a settlement agreement include?
The following clauses should normally be included in a settlement agreement:
- A clause specifying what date your employment will terminate on;
- A clause outlining what the outstanding balance of your salary, bonus, commission, and holiday pay should be;
- A clause specifying that a ‘termination payment’ will be paid to you and what the value of the ‘termination payment’ will be (this can normally be paid tax-free as compensation for termination of employment, up to a maximum of £30,000);
- Standard confidentiality clauses protecting the reasons for terminating employment, the fact of the settlement agreement, and the terms of the settlement agreement;
- A ‘non-derogatory’ clause which would prevent both parties from making adverse or derogatory comments about the other;
- A clause confirming that the employer will pay the employee’s legal fees up to a certain amount (normally £500 plus VAT);
- A ‘waiver’ clause confirming that the employee is agreeing to waive any and all claims that they may have arising out of their employment and the termination of their employment (although there are some exceptions to this, such as claims for latent personal injury and accrued pension);
- A clause entitling the employee to a specific form of reference once their employment has terminated;
- A clause confirming that the employee must receive independent legal advice from a ‘legal adviser’ (such as a solicitor)
There are, of course, other clauses which can also be included in a settlement agreement, and what will need to be included in each settlement agreement will depend upon the specific circumstances of each case.
What must be included in a settlement agreement?
In order for a settlement agreement to be legally valid it must meet the following requirements:
- The agreement must be in writing;
- The agreement must relate to a “particular complaint” or “particular proceedings” (for example, reference to an unfair dismissal claim (or other forms of claim) or a particular Employment Tribunal claim number);
- The employee who is entering into the settlement agreement must have received legal advice from a relevant independent adviser on the terms and effect of the proposed settlement agreement and the effect of the settlement agreement on the employee’s ability to pursue their rights before an employment tribunal;
- The independent adviser who is advising the employee must be covered by a contract of insurance, or professional indemnity insurance, covering the risk of a claim against them by the employee in respect of that advice;
- The settlement agreement must identify the relevant independent adviser; and
- The settlement agreement must state that the conditions regulating settlement agreements under the relevant statutory provisions (whichever apply in the circumstances) have been satisfied
If you would like to discuss what terms a settlement agreement should include with one of our specialist employment solicitors then please feel free to call us on 020 3397 3603, email us, or request a call back.