Settlement agreements, termination pay, and getting a good deal

If you are an employee and have recently been terminated from your post, you may have been provided with an employee settlement agreement.

In this article, we’re going to briefly discuss what this is, why it’s necessary, and what you need to do when your employer sends you one.

What is an employment settlement agreement?

An employment settlement agreement is a legally binding agreement between an employee and an employer which is drafted as they prepare to part ways.

It is common for employers to provide a termination payment when an employee when both parties agree to part ways – it ensures that the employee cannot then sue the employer or take them to an employment tribunal for more money. The employee essentially signs away some of their rights to being a claim in exchange for a lump-sum payment – called the termination payment.

One of the agreement’s purposes is to explain how much this termination payment is and what the employee has to do to keep it. This commonly boils down to returning all company property, not speaking ill of the company or its employees, and not providing trade secrets to the employer’s competitors. This is, of course, a simplification of the contents and some agreements have far stricter clauses than others.

The settlement agreement will also codify all other payments to the employee – such as payments in lieu of notice (if they’re not going to be working their notice period), untaken holiday entitlement, and wages.

Importantly, the agreement can also contain specific wording for employment references that the employer can use in future. In this way, the employee can guarantee the quality of the reference they will receive in the future – when they move on to other jobs.

When will the employee receive the termination payment?

All sums due to the employee, which aren’t on a standard payroll basis (such as salary), should be paid with 1-3 weeks.

Why is a solicitor involved?

Because the employee is waiving some of their rights, the agreement can only be recognised in law if it is ‘signed off’ by a solicitor or other recognised person. A solicitor will only sign off on the agreement once they have reviewed the terms and spoken to the employee – making sure that they understand the contents and implications of the agreement – and that they are happy to be bound by the restrictive terms.

The solicitor will be able to identify potential claims that the employee may have against the employer and what they may expect to be awarded – if they did have a claim – at an employment tribunal.

This information can be used to make sure that a suitable termination payment is agreed between the parties.

If the employee signs a settlement agreement without taking legal advice, the agreement will not bind them – as they may not have known what they agreed to when they signed away their rights.

Because of this, it is in both the employee’s and employer’s best interests to have the agreement reviewed and signed off by a specialist in the area – who can identify what needs amending – before it becomes a problem.

Who pays for this?

As this it is necessary for the employee to obtain legal advice – indeed this is the only way that the employer can rely on the agreement – it is accepted that the employer will cover either some or all of the legal fees. This varies from contract to contract, given the complexity of the agreements being looked at.

Expert legal advice on settlement agreements 

If you have been provided with an employment settlement agreement from your employer, you require independent legal advice. If you are an employer who requires help drafting a suitable agreement, our employment team can help with that too.

Our team of solicitors in Brighton, Eastbourne, London, Hastings and Uckfield can help you understand your options.