Settlement Agreements: Why it’s so important to get advice from a specialist Employment Solicitor

They may look fairly straightforward on the surface, but settlement agreements can often be complex for both employer and employee. Whether you are an employer preparing a settlement agreement to give to an employee who is leaving, or you are an employee who has been given a settlement agreement by your employer, it is important that you get advice from a specialist employment lawyer to be confident that you understand what you are signing, to ensure that you are aware of your rights and obligations under the agreement and furthermore, to ensure the agreement confers the benefits and protection the parties intended it to

A settlement agreement is a binding contract between employer and employee. In return for consideration (often financial), the employee agrees to waive their right to bring any claims against their employer relating to their employment or its termination. There are specific rules governing settlement agreements which must be followed if the agreement is to be valid, for example, the agreement must refer to that particular employee’s specific claims, which will vary depending on the circumstances of their employment and the reason why they are leaving. It is also a legal requirement for the employee to obtain independent legal advice on the terms and effect of the agreement – a requirement which goes far beyond just reading out the terms of the agreement. The legal advice is commonly paid for by the employer.

Advice for employees

All too often, lawyers who do not specialise in employment law will be happy to sign the agreement as the employee’s advisor without fully understanding the implications of all of its terms, and therefore the employee is not always given the full picture of exactly what they are signing. As an employee, it is important that you consider speaking to a specialist employment lawyer if you have been given a settlement agreement. Very often, when we advise an employee on a settlement agreement there are aspects which we suggest should be amended to produce a more balanced agreement, rather than one which is (typically) drafted in the employer’s favour. As a result we can often obtain a better outcome for the employee, whether that be extending deadlines for compliance with obligations, obtaining a higher settlement figure or securing more favourable payment terms through negotiation with the employer, or exploiting our detailed knowledge of employment law to improve the employee’s position .

Advice for employers

Employers who are preparing a settlement agreement for an employee sometimes use an old settlement agreement that has been prepared for a previous departing employee, without seeking advice on what changes need to be made to the agreement, or how the payment to the employee should be structured. This is risky for the employer, as an agreement which has not been tailored to the specific individual may well be unenforceable or fail to afford the desired protection to the employer. The departing employee may not in fact be bound by the terms of the agreement and may still be able to bring Tribunal proceedings against the employer.

If the employee is subject to post-termination restrictive covenants once they have left, it is important that these are correctly addressed in a valid settlement agreement in order to ensure that the employer’s business is protected. There may also be serious implications if the payment to the employee is not structured correctly. It is possible to pay up to £30,000 of genuine compensation to an employee tax free under a settlement agreement, but this must be genuine compensation and should not include elements which are taxable, such as notice pay, accrued but untaken holiday or outstanding salary. However, where the compensation can be paid tax free, there may be tax savings to the employer of which it not aware. An employment lawyer can explain how to structure the payment in the most tax efficient way and include clauses to ensure the employer is not left with an unexpected tax bill. If you are an employer considering offering a settlement agreement to an employee, you should always obtain advice from a specialist employment lawyer before handing over the agreement to ensure the agreement you are offering is legal, enforceable and provides the appropriate level of protection for your business.

If you would like advice on any aspect of a Settlement Agreement, please call the employment team at Askews Legal on 024 7623 1000 and speak to a specialist employment law solicitor today.

Askews Legal LLP – Solicitors in Coventry.