What should be included in a settlement agreement? A settlement agreement needs to be a comprehensive document setting out all of the terms of the end of your employment.
Let’s start with the basics, “What is a settlement agreement?”.
A settlement agreement is a document where an employee and their employer both agree to end their employment in exchange for certain compensation.
That might be salary, bonuses, pension contributions, or even non-financial compensation such as keeping company cars or tech such as laptops, phones and tablets.
Settlement agreements are common during redundancy arrangements, but they are also used in non redundancy situations to bring an employee’s employment to an end.
Let’s look at what should a settlement agreement include in a little more detail.
What Should A Settlement Agreement Include?
A settlement agreement should include EVERYTHING required to terminate your employment.
There’s no ifs, buts, maybes or ambiguity when it comes to what a settlement agreement should include – you need to be clear, precise, and detailed and it must include ALL of the terms of your settlement with your employer.
There are loads of things you might want to consider, but some of the terms you should definitely be including in a settlement agreement are:
- A termination payment – this is financial compensation for the end of the employee’s time in your employment
- Any remaining salary, notice pay, holiday pay, bonuses, commission, and any other figures which will be paid to you
- A written agreement for the employee to waive their right to bring legal action at a later date via employment tribunal or otherwise
- A signature by a solicitor, union official, or Citizens Advice Bureau advocate.
- A ‘non-derogatory clause’ where both the employee and employer agree not to say anything negative about each other
- A non-disclosure clause
There are loads of other clauses, payments, and details that might be included, but the main ones are listed above.
It’s important to consider what your goal is at the beginning of any settlement agreement process.
For example, if you want to bring the matter to a close permanently without any risk of legal action then you should be prepared to negotiate on that basis.
Which might mean compromising on certain other aspects of the arrangement such as the financial side of the deal, which is why settlement agreements used to be called ‘Compromise Agreements’, as each party compromises something to terminate the employment contract. The employer compromises with money, the employee compromises with compensation as they will no longer have a job.
Remember, there are specific tax rules that relate to compensation and termination payments.
For example, the first £30,000 of any termination payment outside of any notice pay or pay in lieu of notice is tax-free.
If anything is missed in the arrangement, the employee may have a case to bring legal action further down the line, which is a risk simply not worth taking.
That’s why it’s usually wise to think about a settlement agreement – for both parties.
Employment tribunals are a last resort because they’re long, the waiting list is extensive, they’re costly, and you start to get tangled in all sorts of legal battles…
Plus, they’re often not very pleasant – nothing to do with the law is, usually.
What About Redundancy – Should I Offer A Settlement Agreement Instead?
It’s a good question.
It’s certainly worth considering. Every case is different, and it’ll depend on the circumstances involved.
If an employee has evidence of unfair, wrongful, or constructive dismissal then it’s probably in the employer’s best interest to come to an agreement that eliminates the possibility of an employment tribunal.
If there’s allegations of discrimination or there’s an element of whistleblowing involved in the case, then again it’s probably wise to find an agreement outside of legal action.
It’s a mutually beneficial situation, really.
As an employee, you get more money, less hassle, and certainty about your future.
As an employer, you avoid a costly legal case and the associated stress, as well as getting closure on the case and you’re both able to move forwards.
However, as an employee, you do NOT have to accept a settlement agreement. It’s a negotiating process, and an employer may decide to proceed with the redundancy process as initially planned.
It still might be worth seeking redundancy advice from a solicitor to ensure that the redundancy process has been carried out properly AND fairly to avoid an unfair dismissal claim.
If an employee has been dismissed or forced to resign, has been employed for at least 2 years, and has evidence of unfair dismissal, then you should expect to pay between 1-4 month’s salary plus notice pay.
If they have evidence of whistleblowing or discrimination, then that figure could rise to 6 months or more.
This is only a rough guide, though, and any figures will be determined by the individual case, circumstances, and people involved.
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