A settlement agreement also referred to as a settlement NDA, is a legally binding contract between the employer and an employee, which settles claims that the Employee may have against their employer in return for a discretionary severance payment. If all parties involved in the Agreement fail to reach an agreement on the final terms, then the negotiation may be disallowed as evidence to support claims before a court or an employment tribunal.
When is a Settlement Agreement Used?
Settlement Agreements are normally used in redundancy situations or to bring an employee’s employment to an employment relationship, which, for whatsoever reason, is no longer working. It can also be used to settle workplace disputes and grievances.
Settlement agreements are particularly suitable when you are looking to avoid the uncertainty of going to court, employment tribunal, or when you simply don’t have the time and resources of going through a long formal grievance, disciplinary, capability, or redundancy procedure.
How are the Terms and Conditions Decided within a Settlement Agreement?
The terms of a settlement agreement are usually mutually agreed between the employer and the Employee. The terms of the Agreement are then set out in the written settlement agreement document, which will identify the claims which the Employee has agreed not to pursue in exchange for an agreed discretionary severance payment. The employer cannot force their Employee to enter into a settlement agreement or agree to the set terms and conditions of the Agreement.
The Settlement Payments
All settlement agreements must contain a clear breakdown of the payments which have been agreed upon by both parties and should also state whether the payment is to be made to the Employee tax-free.
Usually, payments of up to $30,0000 compensation can be paid without tax deductions if the payments are being made on an “Ex gratia basis” (i.e., it’s a payment that you have to decide to make rather than one you have been legally required to make) or as damages to reimburse for a breach of an agreement you made with the Employee. But, this can be a very tricky area, and it is always important that you seek professional advice before having to commit to making payments tax-free.
What Claims Should Be Waived?
Most legal claims regarding contractual and statutory rights can be waived as part of the agreed terms and conditions in a settlement agreement, including unfair dismissal, unlawful deduction of payment, discrimination of any kind, and entitlement to statutory redundancy pay.
However, not all claims can be settled in this manner, such as claims of personal injury, accrued pension entitlement, which have not been brought forth at the date of the Agreement and claims due to breach of the Settlement itself.
How Much Should be Paid in the Settlement Agreement?
There are no set limits of payment laid down in the law, and the amount of any settlement payment will often depend upon the specific circumstances of each case. The following factors may come in handy when considering how much to offer the Employee in a settlement claim:
- The duration the Employee has been working for you
- The potential liability and cost of defending the claim in court or employment tribunal
- The situations around why you are offering the Employee a settlement agreement
- How long it would take to have the dispute settled if an agreement was not reached
You may also have to cover any benefits accrued up to the date of termination, any undertaken holiday allowance, any bonuses, outstanding holiday pay, notice or payment in place of notice, etc.
If the employee has been employed at your organization for two years or more and you are making them redundant, then they may also be entitled to a statutory redundancy payment. The amount they receive will usually depend on their age and the length of service as your Employee.
What Non-Financial Terms Should Be Included in a Settlement Agreement?
Often, it is the case then an agreed reference will be part of the settlement agreement, with a clause included stating that the Employee, when issuing reference for their Employee, will not under any circumstance deviate from the wording, which has been agreed upon as part of their deal.
The settlement agreement will also a confidentiality clause, stating that the Employee will keep the terms of the Agreement, the amount they are to be paid as settlement amount, and the reasons for the settlement agreement confidential.
Mitchel promises and agrees that, unless obliged by a legal process, she will not under any other circumstance disclose to others and will keep confidential both the fact of and the set terms of this settlement agreement, including the amounts, referred to in this Agreement, except that she may disclose this information to her spouse and to her attorneys, accountants and any other professional advisor to whom the disclosure of the information is necessary to accomplish the purposes for which Mitchel has consulted such advisors. Mitchel promises explicitly and agrees that, unless obliged by a legal process, she will not disclose to any current or former employees of XYZ the facts or the terms of this settlement agreement.
Furthermore, it is common for the Agreement also to have a provision preventing the Employee from making any derogatory comments about their employer.
The parties herein agree that they, their heirs, agents, employees, attorneys, and assigns shall not disparage or make derogatory remarks about any of the parties herein or their heirs, agents, assigns, employees, officers, attorneys, and directors.
Other Confidentiality of Settlement Sample Clauses:
- The Employee herein agrees that any settlement amount paid to them according to this Section will remain confidential as between Employer/company and the Employee, and shall not be under any circumstance disclosed to any other party by the Employee or the Employer, other than as required by law, to any person, persons, associations, corporations, or organizations whatsoever except for the Employee’s spouse, legal and financial advisors and any other advisor in the Company and its financial and legal advisors who need to know and in each such case only in the utmost confidence.
- Any settlement made under this Article 3 shall be kept confidential and shall not under any circumstance not listed herein be disclosed by (i) ServiceNow to any persons, person, corporation, organization, or group whatsoever except for Paul, Henry, and ServiceNow’s legal, financial and accounting advisors and (ii) the corporation to any person, group, corporation, organization whatsoever other than (a) its legal, financial and accounting advisors and (b) as may be mandated under any applicable security laws.
- ABC and XYZ limited, as a result of this, agree that they will keep each of the terms of this settlement agreement confidential and that such confidentiality is a material term of this settlement agreement. Except as required by court order or by the law, neither ABC nor XYZ shall directly or indirectly publish, make or cause to be published or made any statement to any third party with regards to the subject matter of this Agreement. Such obligations of confidentiality shall not under any circumstance be diminished by, and shall continue to be enforced in full force and effect regardless of, any obligations of TSET, as a publicity-held institution, to make disclosures regarding thereto in fulfillment of the reporting requirements to which TSET is subject to under state security and federal laws. If inquiries are made of ABC or XYZ by any third party with regards to the transactions set forth herein, ABC and XYZ shall only state that the dispute between them has been amicably resolved on mutually agreeable terms.
- The executives herein agree that any statement made pursuant to this article shall not be disclosed to any other person, group, corporation, or organization by the executive with the exception of the Executive ant their legal, accounting, and financial advisors.
- The parties herein and their counsel hereby agree that they shall keep the Settlement, and the prospects of this settlement agreement, absolutely confidential until all Settling Parties have executed this Agreement unless the disclosure of any part of this Agreement is required by law. CBW and Plaintiffs will exchange drafts of press releases concerning the Settlement by 7:00 p.m., EAT, in advance of the day that CBW intends to announce the Settlement publicly.
- Both parties understand that the fact of this Agreement and its terms are private. Accordingly, both parties agree that the terms of this settlement agreement shall not under any circumstance be disclosed to any other person/party without the informed, written consent of the other party in this Agreement.
Free Samples & Examples
How to Make Sure That the Settlement Agreement is Legally Binding
A key point to note is that, for a settlement agreement to be valid and legally binding, it will need to meet several statutory requirements, including that it must be written and not in soft copy, and must specify the particular complaints which the agreements are looking to settle. To find out other clauses that must be included in a confidentiality agreement, check out our basic confidentiality agreement.
More importantly, the Employee must have been issued advice of the terms and effect of the settlement agreement in advance from an independent solicitor or any other adviser specified in the Employment Rights Act 1996, such as a certified trade union certificate that the adviser must be clearly identified in the Agreement and their advice must be covered by insurance.
If the Agreement does not meet all the statutory requirements, then it will not be a valid settlement and will leave open a chance for the Employee to lay claims against their employer. It is, therefore, imperative that much precaution is taken when drafting a settlement agreement.
It is also crucial that any discussions made between the employer and the employee about the proposed settlement agreement meet certain legal requirements, as otherwise, if the settlement agreement does not end up being entered into, such discussions could end up being used as evidence in any litigations that may proceed.
Settlement agreements are a useful way of making sure that employer-employee disputes are concluded without the need of either side taking legal action against the other. Nevertheless, the law relating to them can be complex, and it is always a great idea to seek proper professional advice before you begin to go along the settlement agreement route.