It can be significantly disconcerting to receive a settlement agreement for any employee. Whether it was expected or completely unexpected, it is often unchartered territory and an uncertain time. The process can feel formal and risky, especially if the employer is imposing short deadlines or other pressurising tactics.
Due to the impact a settlement agreement has on an employee’s rights, it is a requirement for employees to obtain independent legal advice from a qualified professional upon the terms of the agreement and its legal effect.
There are a variety of reasons why a business may need to terminate a contract of employment. These could be due to factors external to the relationship such as certain economic or financial pressures, organisational restructures, mergers, or departmental driven by changes in the market. They may also stem from internal issues within the employment relationship, such as disputes whereby the relationship has broken down, prolonged sickness absence, performance or conduct-related issues.
To mitigate the inherent imbalance in bargaining power within the employment relationship, the law puts in place a framework of safeguards designed to ensure fairness and transparency when this relationship is brought to an end. These may include statutory procedures, consultation and notice requirements and other checks and balances which ensure employers do not let go of their employees arbitrarily or subject them to any undue pressure.
A common alternative option is where the parties agree to reach a mutually acceptable resolution by way of a settlement agreement. They provide speed, flexibility and risk management in potentially contentious and complex situations.
Essentially, settlement agreements, once signed, are legally binding agreements between the employee and employer, documenting the terms on which the employment relationship is to end. For the agreement to become legally binding, it must:
- a) be in writing;
- b) relate to a particular complaint or proceedings; and
- c) the employee must receive independent legal advice from a qualified advisor.
This is to ensure that the employee fully understands the implications of waiving their rights before signing. It is important to note that, if an employee is not happy with the proposals contained in the agreement, they do not have to sign it and may opt to follow the applicable procedure or proceed to an Employment Tribunal.
The defining feature of these agreements is that they represent a binding waiver or any claims the employee may make against the company, such as unfair dismissal, discrimination or breach of contract, in exchange financial compensation. It is often found that when employees receive legal advice, they become aware of claims they could bring arising from various situations occurring in their employment. These claims could offer valuable leverage to negotiate a higher compensation payment in exchange for their waiver.
The agreement may also include additional payments owed to the employee, such as compensation for accrued but unused holiday entitlement and payment in lieu of notice. In practice, the figures stated in the agreement do not always accurately reflect the employee’s circumstances. It is crucial to ensure these figures are accurate, as the waiver typically prevents the employee from pursuing any payments not expressly included in the agreement.
In addition, these agreements will commonly also contain other clauses setting out various rights and obligations surrounding confidentiality, restrictions on bad mouthing, references, post-termination restrictions (i.e. non-solicitation, non-poaching and non-compete clauses) as well as clauses concerning other practical matters such as the return of any company property.
It follows that settlements agreements, while they offer a practical and efficient way to resolve disputes and avoid lengthy procedures, they can also carry significant legal implications for employees. Consequently, independent legal advice is not merely a procedural requirement; it serves as a crucial safeguard to promote fairness and secure the most favourable outcome for employees.
Our team of Employment experts are well equipped to advise on settlement agreements. If you have received a settlement agreement or are dealing with any matter relating to the termination of your employment and are concerned about your rights, please contact us.
