Typical terms in a settlement agreement

In order for a settlement agreement to hold legal weight, certain prerequisites must be met.

The agreement must be documented in writing, it must pertain to a specific complaint or legal proceedings, the employee must have received independent legal counsel regarding the agreement’s terms and implications, and the advisor must carry professional indemnity insurance.

Visually, a settlement agreement takes on the appearance of an employment contract. It includes the names of both the employer and employee on the cover page, with a provision for adding a date once the document is signed by all involved parties.

Typically, definitions are presented within the agreement itself, though sometimes they may be provided in a separate schedule accompanying the agreement.

The agreement explicitly states that, by signing it, neither the employer nor the employee acknowledges legal responsibility (liability) for any actions or omissions that may have resulted in financial losses or emotional distress.

The core contents of a settlement agreement include:

1 – Termination Date

This marks the date on which the employment relationship will cease. Even if the agreement is executed after the termination date has passed, it remains valid. If the termination date is set for the future, the employee may be required to sign a reaffirmation, which will be discussed later.

2 – Compensation and Benefits

The employee continues to receive their regular pay, including all associated benefits such as annual leave, up to the termination date when these benefits will cease.

3 – Notice Period

The notice period can be managed in various ways:

  • Worked: The employee might be asked to serve out the notice period, during which they remain under the terms of the employment contract.
  • Garden Leave: Garden leave usually matches the length of the notice period, during which the employee may be expected to work but with certain restrictions in place. Typically, the employee is required to perform a handover or be available when needed. They are often instructed to stay away from the office and refrain from contacting colleagues, clients, suppliers, or business associates.
  • Payment in Lieu of Notice (PILON): When the employer doesn’t require the employee to continue working, they may set a termination date and provide a lump sum equivalent to the notice period, subject to tax and national insurance deductions. Some employers may choose a hybrid approach, having the employee work part of the notice period and paying the rest in lieu.

4 – Termination Payment

Also known as an ex-gratia or compensation payment, this payment is discretionary and is designed to motivate the employee to accept the settlement agreement and refrain from pursuing legal claims against the employer. Notably, this payment is tax-free up to £30,000. Its value is contingent on the circumstances leading to the settlement agreement, but typically amounts to around three months’ net pay. To receive this payment, the employee must confirm certain statements as true, such as not being aware of circumstances warranting summary dismissal for gross misconduct and not having accepted a job offer at the date of the agreement.

5 – Pension

The settlement agreement specifies that the employer will notify the pension scheme of the employment termination, which results in the freezing of the pension. Should any concerns arise regarding the pension, seeking specialized pension advice is recommended.

6 – Legal Fees

Typically, the employer will contribute to the employee’s legal fees associated with obtaining advice on the settlement agreement, usually amounting to £500 plus VAT on average.

7 – Waiver

While a settlement agreement is generally offered by the employer in exchange for the employee’s agreement to terminate the employment contract and abstain from pursuing claims against the employer, it should not impede the employee’s ability to lodge claims that fall into certain categories.

8 – Company Property

The agreement will require the employee to return all company property no later than the termination date, allowing for an additional 7-10 days for making necessary arrangements if required. In some cases, employees may negotiate the retention of company equipment as part of the settlement agreement.

9 – References

The terms of a reference are typically attached to the settlement agreement. These references are often limited to confirming the employee’s start date, end date, and job title.

10 – Post-termination Restrictions/Restrictive Covenants

Detailed within the employment contract, these clauses often remain enforceable for a period after the termination date.

11 – Confidentiality

This obligation persists not only for information acquired during the employment but also extends to the terms of the settlement agreement itself. It may specify certain individuals with whom the employee can discuss the agreement’s terms, provided confidentiality is maintained.

12 – Reaffirmation

If an employee enters a settlement agreement before the termination date, the employer may require the employee to sign a reaffirmation within a specified timeframe after the termination date, usually within 7 days. This reaffirmation represents the employee’s further confirmation that the terms of the agreement are accurate and true, especially the warranties.

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