What are the Benefits of Settlement Agreements?

What are the benefits of Settlement Agreements? – looking at the departure of David Moyes as a case study

The word “sacked” is highly emotive and given that David Moyes was originally reported to have a 6 year contract it is more than likely that a deal has been brokered in the background to ease his exit from the Manchester United hot seat. Such a deal would be, if properly framed, a Settlement Agreement.

What is a Settlement Agreement?

A Settlement Agreement (formerly a Compromise agreement) is an agreement between an employer and employee to compromise an employee’s contractual and statutory claims on termination of employment. They can also be used to settle any ongoing claims such as claims for holiday pay whilst the employee is still in employment.

What are the benefits?

Settlement Agreements are popular with employers as a means of avoiding long capability processes or simply cases where the working relationship has broken down. Ultimately, the content of a Settlement Agreement is, subject to some legal requirements, for the parties to decide.

Are there any rules for a Settlement Agreement to be binding?

For such agreements to be binding certain rules must be followed:-

• The agreement must be in writing.
• The agreement must relate to a particular complaint or proceedings.
• The employee must have received advice from a relevant independent adviser, such as a lawyer or a certified and authorised member of a trade union.
• The independent adviser must have a current contract of insurance or professional indemnity covering the risk of a claim by the employee in respect of loss arising from the advice.
• The agreement must identify the adviser.
• The agreement must state that the applicable statutory conditions regulating the settlement agreement have been met.

Also employees should be given a reasonable amount of time to consider the proposed conditions of the agreement; the Acas Code of Practice on settlement agreements specifies a minimum of 10 calendar days unless the parties agree otherwise.

What do I need to know?

Settlement agreements are voluntary and parties do not have to agree to them or enter into discussion about them. There can be a process of negotiation during which both sides make proposals and counter proposals until an agreement is reached or both parties decide no agreement can be reached.

If a settlement agreement is not reached employers may seek to terminate the employee’s employment by other means.

The terms of a Settlement Agreement can be really quite broad. In addition to a financial sum, parties are free to agree terms such as restrictions on future employment, references and even what statements will be made to the press.

What would I expect to see in David Moyes’ settlement agreement?

Given the length of David Moyes’ contract I would expect to see terms relating to the payment in lieu of his notice period. This would mean that instead of working his notice period he would receive a cash payment in exchange. This is sometimes referred to as PILON.

Equally, given the contentious nature of the decision to terminate his employment I would expect to see terms relating to:

• Settlement sums;
• The contents of media statements;
• Terms relating to confidentiality;
• Terms relating to when David Moyes can seek employment from a potential future employer (these are known as restrictive covenants); and
• Terms to the effect that no derogatory statements should be made by either party.

Ultimately, the content of a settlement agreement is for the parties to the agreement to decide. In such circumstances, the bargaining power of the parties will depend on the background as to why the Settlement Agreement has been issued but for them to be binding there is a need for independent legal advice to be taken by the employee.

By taking independent legal advice parties can make sure that their interests are represented and taken account of in terms of the Settlement Agreement. In order to meet the legal requirement for independent legal advice to be taken, many employers, when issuing a Settlement Agreement will make a contribution towards the employee’s legal fees.
This briefing was prepared by Ewan Stafford who is an employment law solicitor with Macleod and MacCallum. Ewan regularly prepares and negotiates settlement agreements for employers and advises individuals on their rights when entering into settlement agreements.
This Briefing has been produced for information purposes only and is based on the law and other information available at the time of writing. We cannot be held responsible for any losses incurred through acting or failing to act on the basis of anything contained in this Briefing.

If you require advice on any of the matters referred to, please contact us so that we can advise you, taking account of your own particular circumstances and requirements.

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