If you’re reading this post, you’re probably thinking: What should I include 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.
A settlement agreement is where an employee gives up their right to take legal action against an employer after they leave. Usually, it’s agreed as part of a payment when an employee 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 unfair, constructive or wrongful dismissal.
It’s an important agreement for a lot of reasons, which is why it’s super important that you include everything to cover yourself AND your employee – to avoid any legal action further down the line.
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 confidentially clauses. And if an employee had any life insurance or health insurance policies, 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 computers.
Everybody wants to end the process as quickly as possible, so it’s common for people 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 2 years or more, and has evidence to prove either unfair or constructive dismissal…
Then they’ll most likely be looking for between 1 and 4 months’ salary plus any notice 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.
Want to know how much you should pay?
Visit our Settlement Agreement Calculator to find our recommended payout
What Should I Include In A Settlement Agreement?
Anything and everything that is relevant.
This is one of those situations where you need to be overly cautious.
But there are some things that you should consider including in settlement agreements, such as:
- A termination payment.
- The outstanding ‘balance’ of any salary, notice pay, holiday pay, bonuses, commission, and any other figures.
- A confidentiality clause (aka non-disclosure clause).
- An agreement for the employee to waive their right to bring legal action.
- A contribution towards the employee’s legal fees.
- A signature by a solicitor, union official, or Citizens Advice Bureau advocate.
- An agreement to provide a ‘good’ reference (the employee may request this).
- A ‘non-derogatory clause’ where both the employee and employer agree not to say anything negative about each other.
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.
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.
In most cases, it’s worth thinking about offering a settlement agreement. And if you’re thinking about it, it’s probably worth coming to an agreement.
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 get a 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.
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’s 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 are here to help. Give us a call on 01491 598 600 or drop us a line at firstname.lastname@example.org and we can discuss.
Want to read more about settlement agreements? Head over to our Settlement Agreements information centre…
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