Essential Terms of a Settlement Agreement
A settlement agreement is a legally binding contract entered into between an employer and an employee. It is usually used to resolve a dispute between the parties or to terminate the employment relationship and once you’ve signed it, there is no going back.
With this in mind, there are certain elements that are essential in any settlement agreement.
Essential elements of a settlement agreement
Every settlement agreement should be tailored to reflect the exact requirements of the situation. However, there are some key elements that should nearly always be included.
Ending the employment relationship
The agreement should set out when the employment contract comes to an end. This should take into account notice periods and/or garden leave.
Grievances
Most settlement agreements bring to a close all grievances between the parties. Therefore, this should be carefully addressed in both the negotiation and the terms of the agreement, and any financial agreement should reflect that the employee will not be able to bring any further claims against the employer. The fact that all grievances have been dealt with should be stipulated in the agreement.
Financial matters
The agreement should clearly set out what money is to be received by the employee and on what terms (i.e. by way of one lump sum payment, by instalment, etc.). This is a once and for all agreement about all financial matters between the parties so this needs to be carefully considered.
Things to take account of will be pay, holiday pay, perks, notice pay, tax free sums, bonuses, shares, commission, etc. The agreement should set out what will be paid and when, as well as whether payment is conditional on anything, i.e. conditional on the employee not having a new job to go to or a job offer. Parties should agree who is going to take responsibility for things like tax and should set out details for the return of employer property.
Confidentiality
It is common for an employer to seek to include a confidentiality clause preventing an employee from speaking disparagingly about the employer or disclosing confidential information. You can find out more about confidentiality clauses here: Confidentiality Clauses
Reference and reason for leaving
The giving of a reference by the employer and the reason for leaving needs to be considered carefully. Some settlements will include an agreement by the employer to provide the employee with a reasonable reference although in some cases, an employer may only agree to give a standard reference.
In writing
For a settlement agreement to be legally binding it must be in writing. It should also confirm that the employee has received independent legal advice about the terms of the agreement, along with the identity of the adviser (who must be insured to give advice).
Costs
Inevitably, legal costs will have been incurred by the parties as they negotiate and agree the terms of the settlement. It is not unusual for an employer to agree to contribute to the employee’s costs but there is no rule that they have to and this is something that needs to be negotiated and agreed.
If you would like to discuss a settlement agreement or employment issue, please get in touch.
The legal content provided by RSW Law Limited is for information purposes only and should not be relied on in any specific case without legal or other professional advice.
Copyright is owned by RSW Law Limited and all rights in such copyright are reserved. Material is not to be reproduced in whole or in part without prior written consent.
