A settlement agreement is a legally binding contract between the employer and employee to settle claims that the employee may have against the employer. A settlement agreement is used in connection with ending the terms of employment. A settlement agreement could also be used where the employment is ongoing, but parties want to settle a dispute between the parties.
The law defines settlement as a resolution between disputing parties about a legal case reached before or after the start of the court action. Civil litigation is an agreement to settle a dispute or provide a waiver of claims.
Settlement Agreement Definition
In the settlement agreement, the parties define rights and obligations to be abided by as per defined terms and conditions agreed. Each of the Settling Parties agrees that the settlement agreement is a compromise of disputed claims relating to the restructuring, and is intended to be, a complete settlement, discharge, and release of all such claims. In the settlement agreement, none of the settling parties admits to liability and not be described by any settling party, or by its directors, employees, agents, or other representatives, as an admission by any settling party of any liability.
A situation where you might consider using a settlement agreement could be, for example, where an employee is not performing well, and neither party wants to go through a long capability process. Both employer and employee are willing to bring the employment to a quick end on agreed financial terms. The terms of the settlement agreement will be mutually agreed upon between the employer and employee. Those terms will then be set out in the written settlement agreement document, identifying the claims the employee agrees not to pursue in exchange for the agreed payment.
Your settlement agreement should be customized for the specific employee and their circumstances. They must include a clearly expressed waiver of the specific claims that the employee has or could feasibly have. The settlement agreement should contain a clear breakdown of the payments agreed upon and should also state whether any of them are to be paid to the employee free of tax.
The following are some of the factors that are considered:
- How long has the employee worked for an organization
- The circumstances around why the organization is offering a settlement agreement
- How long it would take to settle a dispute if the agreement is not reached
- The potential liability and cost of having to defend a claim
It is the case that an agreed reference will be part of the settlement agreement, with a clause that may include stating that the employer, when providing a reference for the employee, will not deviate from the wording agreed as part of the deal. The settlement agreement includes the confidentiality clause, which may state that the employee will keep the terms of the agreement, the settlement amount, and the reasons for the agreement confidential. Additionally, it’s common for there also to be a clause preventing the employee from making any derogatory comments about the employer.
The settlement agreement usually makes clear that few things are specifically excluded from the settlement agreement domain. For instance, an employee does not give up any pension rights they have accrued and is free to pursue a personal injury claim in respect of any injury suffered during their employment but of which they are currently unaware.
In the agreement, different statutory obligatory requirements may be mentioned, including. The employee must have received advice on the terms of the agreement from an independent solicitor. The adviser must be identified in the written agreement. If the settlement agreement does not meet all of the statutory requirements, it will not be considered a valid settlement agreement, and it will open to the employee to bring claims against the employer. It is therefore vital that a lot of care is taken when drafting the agreement.
Final Thoughts
A settlement agreement is a legal, written contract in which an employee agrees not to file an employment law claim against the employer, such as unfair dismissal, wrongful dismissal, or discrimination. This is frequently in exchange for a lump sum payment known as a termination payment.
Workers can also be given settlement agreements in relation to the types of claims they may have, such as the right to paid vacation. Settlement agreements are typically offered as a means of terminating the employment relationship.
