A settlement agreement is a legally binding contract that waives an individual’s rights to make a claim covered by the agreement to an employment tribunal or court. The agreement must be in writing. A valid settlement agreement (or alternatively an ACAS settlement) is the only way that employees can waive their statutory rights.

Settlement agreements have to be in writing and signed off by a relevant independent legal adviser in order to be binding. There is no set format for agreements to take but they have some similarities in their drafting style so that we can provide an indication of some of the terms that you may find in your settlement agreement and what they mean. As it is a requirement to take legal advice you should ensure that you ask your adviser to explain the terms to you and what they mean before you agree to it.

Termination of employment

The majority of settlement agreements bring your employment to an end although this is not mandatory. The date when your employment will end or has ended is normally called the Termination Date. Until that date you have all your contractual rights including the right to remuneration.

Benefits

The agreement normally sets out what will happen to your benefits. It normally sets out any payment for additional holiday untaken which are subject to tax and when your entitlement to other benefits will cease. These can be things like medical insurance and what to do with the company car if these terms apply to you. Quite often the agreement provides that these benefits cease on the termination date but for benefits such as car and medical insurance sometimes these are extended into the period of the notional notice period (the period of time that would have been the notice period) or a future date.

Notice

The agreement will normally set out either a payment in lieu of notice, which if provided contractually, is subject to tax and national insurance deductions or will set out a period of garden leave or that notice has already been paid or worked. The clause may also deal with what will happen during any such garden leave period and set out the conditions you have to comply with i.e. not contacting customers or the office.

Termination Payment

A settlement agreement must provide some consideration to the employee whether this is £1 or £100,000 to entice you to enter into it. This is called a termination payment or settlement payment. Other terms frequently used to describe it are an ex-gratia sum for loss of office. It should be an additional payment aside from any contractual entitlements. If it does not exceed £30,000 and is a non-contractual payment this is usually paid free of deductions for tax and national insurance. It is normally paid within so many days of signature of the settlement agreement, typically 14 or 21 days after signing the agreement.

Legal fees

A normal term of the settlement agreement is that the employer will make a contribution towards legal fees since it is a requirement that the employee takes legal advice. Such sums are normally paid at a later date following conclusion and direct to the legal adviser. The contribution depends on the complexity of the matter and can range from £250 plus VAT up to £1,000 plus VAT. As a point of negotiation sometimes the employer will agree to pay more where there is a complex case or the agreement requires substantial amendments.

Waiver of claims

• It is normal for there to be clause whereby the employer offers the settlement agreement without any admission of liability on their part and that it is in full and final settlement of all and any claims or rights of action that the employee has or may have against your employer.
• It is normal for the agreement to set out the specific complaints it intends to settle and then there is normally a more generic waiver which can list many types of claims some which you do not have. The specific complaint is important for the employer to be able to rely on the agreement as binding.

There are normally three important exceptions to the waiver and it is typical for the agreement to expressly state that it does not waive claims by you to enforce the agreement; claims in respect of personal injury or any claims in respect of accrued pension rights. If one of the claims being settled relates to an injury to feelings award or stress claim the personal injury clause is sometimes limited to future claims you were unaware of or ought not reasonably to be aware of.

Warranties

This is an important section of the agreement and in effect contains your promises to the company. You should ensure that you stick to them otherwise they could refuse to pay the sums due to you under the settlement agreement. Typical warranties include:

• That before entering into the agreement you received independent advice from the relevant independent adviser as to the terms and effect of the agreement and, in particular, on its effect on your ability to pursue any complaint before an employment tribunal or other court. This is the minimum advice you should receive as an employment adviser should really give you some guidance as to whether it is in your best interests to accept.
• Before receiving the advice you disclosed to your adviser all facts and circumstances that may give rise to a claim by you against the Company or their officers or employees;
• There are no circumstances of which you are aware which would amount to a repudiatory breach by you of any express or implied term of your contract of employment which would entitle (or would have entitled) the Company to terminate your employment without notice or payment in lieu of notice. This is where you have committed an act of gross misconduct as had this been discovered previously the Company would not enter into the settlement agreement but would rather have dismissed you without notice. Effectively this is a warranty of good behaviour.

Indemnities

Often the settlement agreement sets out that you will indemnify the Company in respect of the tax and national insurance deductions for any payment made to you tax free.   It is also normal for there to be provision within this term that the Company provides you with access to any documentation you require to dispute such a claim.

Company property and information

There are usually clauses around the return of company property and confidential information which you should ensure that you understand and abide by.
Reference
Sometimes the agreement provides for a reference to be annexed to the back of the agreement so that this is provided on request or sometimes the agreement outlines that a factual reference will be provided.

Restrictive covenants
Often for the payment of a nominal sum in order to protect the tax free status of the termination payment the agreement will either restate the restrictions found in the contract on what an employee can do post employment or who they can deal with.  Sometimes an employer will seek to introduce new restrictions in a settlement agreement or provide some where none were previously set out.
Subject to contract and without prejudice
The agreement is often said to be without prejudice and subject to contact until it is signed by all parties.  This means that it is does not become legal and binding until that time, cannot be referred to or sued upon.

Legal requirements
In order to comply with the legal requirement for the settlement agreement to be binding, there is usually a clause that states that the conditions relating to settlement agreements under various enactments of law have been satisfied. Sometimes this can be a long list of law.