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Settlement Agreements

With the price of oil dipping below $50 a barrel for the first time in five years, and the announcement of over 1200 redundancies at Edinburgh City Council these are difficult times for employers and employees alike in Scotland. With difficult economic decisions to be made, one route that HR departments across the country may be looking at is the use of Settlement Agreements.
A Settlement Agreement is a contractual document that sets out the terms between the parties for the agreed termination of the worker’s employment. The employer pays the employee a sum of money in return for the employee agreeing not to bring any employment claims against the employer for any breaches of Employment legislation.  This “trade-off” should not be agreed to without serious consideration and legal advice on both sides.
The advisor must advise the client on the terms of the agreement and the effect the settlement will have on their employment rights. The employer will usually make a contribution to the employee’s legal fees. 
From an employer’s perspective, a good Settlement Agreement will ensure that their business interests are protected and any future claims are prohibited. To ensure this is done properly the wording of the agreement is crucial. There have been a number of recent cases which have highlighted the danger of using standard or “pro-forma” wording in Settlement Agreements.  When assisting employers in drafting an Agreement we strongly recommend tailoring the agreement to reflect the individual circumstances of each case. 
Using a Settlement Agreement can be an attractive option to employers as it is often a way of saving cost and management time in carrying out a procedure. There is also the safety of knowing that the employee has agreed not to raise any legal proceedings so the employer will not get that call from ACAS notifying them of an Employment Tribunal claim. 
But it is not just the financial aspects that need to be agreed. Each employee we see has a completely different set of circumstances, and needs individual advice. When presented with a Settlement Agreement it is important that the employee takes time to consider whether this is the route they want to take when weighed up against the alternatives.  Generally, the initial terms of a Settlement Agreement can usually be improved, based on potential claims the employee could litigate. 
And it is not only about the money. Often the employees main motivation is the content of the reference.  This is particularly true for the financial sector and for those in oil and gas industry where a “dismissal” on a reference can be a career changer.
Another big issue is their right to work in the same industry. The employee might want to start a new business and has to consider whether there are restrictive covenants in their employment contract that should be considered. Restrictive covenants are designed to protect the employer’s legitimate business interests. The clauses often prevent employees from working for a competitor for a period of time (often 6 to 12 months). When obtaining legal advice on a settlement agreement it is important for the advisor to establish whether there are any such restrictions on an employee’s future employment options. Breach of such covenants can expose the employee to costly legal action which could result in the employee having to pay compensation to the former employer in damages, and face a lengthy court case.
Other areas to look at are tax and “exempt” clauses. Termination payments made in a settlement agreement are normally tax free up to £30,000. The right to bring claims against a former employer concerning latent personal injury or future pension rights should normally be excluded from the general waiving of employment rights.
If the employer won’t raise their settlement offer to a level that the employee considers acceptable the employee still has the option of rejecting the agreement.  If the employee is dismissed they are still within their right to take the matter to an Employment Tribunal within a set time period.
Whether you are an employer or an employee there are a lot of factors in offering or accepting a Settlement Agreement. However if the Agreement can be properly drafted and negotiated to fully reflect the circumstances that led to the agreement it may be both parties interests to opt for this clean break.  It allows both parties to walk away without spending their time, money and resources on the uncertainty of litigation.  The key aspect is to look at each employee position on a case by case basis, and to take legal advice.
For further information relating to Settlement Agreements please contact a member of our Employment Law team.