If you’re reading this post, you’re probably thinking: What should be included in a settlement agreement?
It’s a good question, and it’s one we’re going to answer in good detail – but first, let’s start with the basics.
What is a settlement agreement?
A settlement agreement is where an employee gives up their right to sue an employer after they leave. Usually they are not leaving voluntarily. A settlement agreement includes the details of the payment the employee will receive when they leave, leaves their role, often as part of a redundancy.
After everything is agreed on the employee’s exit, they will not be able to bring a case to an employment tribunal for any reason, including discrimination.
It’s an important agreement for a lot of reasons, which is why it’s super important that you include everything in your settlement agreement to stop your employee suing you after they have left.
How Does A Settlement Agreement Work?
Every settlement agreement is different.
No two situations are the same. A settlement agreement is usually a document where both the employer and the employee have met somewhere in the middle of what they were looking for…
But it’s not just money that’s being agreed upon.
There are also non-financial benefits such as gardening leave and confidentiality clauses. And if an employee had a laptop or company car, they may be allowed to keep them as part of the agreement.
Any benefits that are not money can be used as part of a settlement agreement – that might be company cars, phones, or private health insurance.
Everybody wants to end the process as quickly as possible, so it’s common for employees to settle on an agreement quickly if they feel like it’s close to what they’re looking for.
If the employee has been dismissed or forced to resign, has been employed for longer than 2 years, and has evidence to prove either unfair or constructive dismissal…
Then they’ll most likely be looking for between 1 and 4 months’ salary (tax free) on top of notice pay and outstanding holiday pay.
But if there’s more to it than that (whistleblowing, discrimination etc.) then that expect to pay somewhere north of 6 months’ salary.
Of course, every situation is different, and this is only a rough guide.
What Should Be Included in a Settlement Agreement – The top 8 things that should be included in a settlement agreement to make it rock solid
This is one of those situations where you need to be particularly cautious.
The following list includes the minimum information that must be included in every settlement agreement.
1. A clause stating that the employee will waive their right to bring legal action.
This must be included in the settlement agreement. It is the most important part and the reason we are using this document. You need to include in the settlement agreement that the employee will not only waive their right to bring legal action, but also cancel any claims they have already started. In addition, they may have done a Data Subject Access Request (DSAR) as part of their tribunal claim. If so, then you need to include in the settlement agreement that they agree to drop this request immediately.
2. The outstanding ‘balance’ of any salary, notice pay, holiday pay, bonuses, commission, and any other figures.
This is what all employees are entitled to unless dismissed for gross misconduct. The amounts are paid after tax and NI have been deducted.
Notice pay is the greater of their contractual notice or statutory notice (one week for every completed year of service, capped at 12 weeks). It cannot be any less than the statutory minimum, no matter what it says in the contract.
The biggest disagreements at this stage are usually the amount of outstanding holiday pay. The soon-to-be ex-employee thinks that they are owed five days, you think that it is two days. This is where it is essential that you have proof of what holidays were requested and ideally taken. The request is usually enough, because if they say “Oh but I didn’t go on that holiday” they would have to prove that they had informed you in advance and that you, the employer, had agreed to the cancellation (you don’t have to).
Another contentious area at the end of the relationship is time off in lieu (TOIL). Staff come to us and state that they have 50 hours TOIL that needs to be paid. This is when we discover that they are entitled to TOIL in their contract, but there is no process for logging it and making sure that it has been taken. We recommend changing your contracts if you have TOIL to read that all TOIL has to be taken within 3 calendar months of earning it, otherwise, it expires. That will minimize how much you have to pay out.
3. The termination payment
This is a tax-free amount on top of all the payments in point 1. For the employee, this is the most important part to include in a settlement agreement. This is an amount to compensate the employee for them giving up their right to sue you at the tribunal. Depending on what you have done/done wrong/they have done wrong this can be as little as £500, or as much as one year’s pay. If you want the conversation to go very quickly and smoothly, we recommend offering one year’s pay including notice, holiday, etc. They might win more at the tribunal, but they would have to wait 18 months – 2 years for it. Unless it is a very bad case of discrimination, then their legal advisor will always recommend that they take the money now, and move on.
4. A confidentiality clause (aka non-disclosure clause).
This is essential to make sure that they do not start bragging to their ex-colleagues or even worse, on social media, about how easy it was for them to get money out of you. Including this clause in a settlement agreement means that if they discuss the agreement with anyone other than their spouse/partner and legal advisor, then they have to pay the money back. It is a crucial part of the agreement.
5. A contribution towards the employee’s legal fees.
For a settlement agreement to be binding, the employee has to have taken legal advice from a solicitor. They cannot waive this right. If they do not have legal advice, then the settlement agreement is not worth the paper it is written on.
So to ensure that all this effort does not go to waste, you have to make a contribution to their legal fees. This is usually £500-£650 plus VAT.
We usually start with £600 plus VAT, and this is usually not contested by the employee or their solicitor.
There is no need for you to spend more than that, even if the solicitor has done a lot more work for the employee.
The solicitor would invoice the company directly. You do not pay the employee the money for the solicitor.
This is to make additionally sure that they really have taken proper legal advice, and it is not just a “friend” pretending to be a solicitor so they can keep the money themselves.
6. A signed certificate by a solicitor.
This is essential to prove that they have had proper legal advice and not just a friend pretending to be a legal advisor. This must be on headed paper and usually sent with the invoice.
7. An agreement to provide a ‘good’ reference (the employee may request this).
A written reference is usually agreed upon as part of the settlement agreement. The written reference states the dates of employment, the title, and if possible, the main tasks of the role.
No verbal references should ever be given.
8. A ‘non-derogatory clause’ where both the employee and employer agree not to say anything negative about each other.
This clause is applicable to all those involved in the settlement agreement process, as well as those who just know that someone has left. It applies equally to the ex-employee and their families and legal advisors.
Money and compensation
There are specific tax rules on termination payments and compensation. For example, the first £30,000 of compensation (outside of notice pay/pay in lieu of notice) is tax-free.
Any settlement agreement should outline EVERYTHING that has been agreed upon – money, clauses, termination, payments, and the waiving of legal rights.
This also includes the requirement for the ex-employee to cooperate in tribunal proceedings involving a different employee. One employer forgot to write this into the agreement, despite our asking about it, which meant that the employee refused to make any statements. The employer lost the case.
If anything is missed, the employee may have a case to bring legal action further down the line. And that’s just not worth the risk.
Employment tribunals can be long, expensive, and A LOT of hassle.
Most employees will be happy to draw a line under the situation as long as they feel they have a reasonably fair deal – and finding out what that is to them is a part of the negotiation.
However, an employee doesn’t have to accept the settlement agreement, and you should be prepared for that.
Want to know how much you should pay?
Visit our Settlement Agreement Calculator to find our recommended payout
How Do I Create A Settlement Agreement?
When it comes to any legal documents, don’t try to do it yourself.
I know it might be tempting, but if you get it wrong it can REALLY backfire.
If you’re trying to come to a settlement agreement with an employee, there are a few things you need to accept:
- You won’t get everything you want.
- The employee might push back.
- It’s a complex document and it’s legally binding…
So, to avoid any issues later on, you need to make sure it’s watertight.
If you want any help with making sure your settlement agreement is ready to go, Gap HR is here to help. Give us a call at 01491 598 600 or drop us a line at email@example.com and we can discuss.
Want to read more about settlement agreements? Head over to our Settlement Agreements information centre…
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