Managing the end of someone's employment can be a stressful time for both parties. And this is especially the case if the employment ended on a sour note.
One way to resolve this issue is via settlement agreements. These agreements can help the dispute between employer and employee be resolved in an amicable way for both parties. So, it's important you understand how they work.
In this guide, we'll discuss what settlement agreements are, when they're used, and what should be included in them.
What is a settlement agreement?
Settlement agreements are contracts that see compensation being paid by an employer, in return for an employee agreeing not to make legal claims.
In most cases, they are connected to the end of employment with agreed terms. However, they can also be used during employment when both parties want to settle a dispute.
They are seen as a good way to end the working relationship positively without the need for further conflict.
Are settlement agreements legally binding?
Under Irish employment law, for a settlement agreement to be legally binding the following conditions must be met:
- The agreement must be in writing.
- The agreement must be concerning a certain complaint.
- The employee must have received some legal advice from an independent adviser, such as a lawyer or member of a trade union.
Are settlement agreements the same as a compromise agreement?
Yes, they are the same. Settlement agreements can go by a variety of different names, such as exit agreements, compromise agreements or termination agreements.
Settlement agreement and the tax implications
How much tax an employee will pay on settlement agreements depends on the nature of payments made.
For example, wages, holiday pay, bonuses, commission payments and other contractual payments are subject to normal income tax and PRSI ductions.
It's important you know this before you start the process of a settlement agreement.
Benefits of settlement agreements
The main benefit of a settlement agreement is that you have certainty that you won't be taken to the Workplace Relations Commission (WRC) or the Labour Court. The last thing you want is claims to be taken to court when they don't have to.
They also provide the option for a swift and certain end to a dispute, without the need for the employee to work their notice period.
When is a settlement agreement used?
The main reason why a settlement agreement is used is so the employee doesn't proceed with a legal claim against their employer.
Redundancy
Employers sometimes opt to use settlement agreements during the redundancy process. If there are circumstances where the employer wishes to make redundancies they must follow a fair process.
A settlement agreement could be considered if the employer offers to pay more than the statutory redundancy pay entitlement.
Remember, if you don't follow a correct fair redundancy procedure you may be liable to unfair dismissal claims.
Disciplinary
A settlement agreement is sometimes used when a disciplinary issue arises. You may not be happy with the ongoing performance and standard of work from an employee and want them to leave the company.
You may choose to use an agreement so you can end their employment sooner than going down the improvement plan route.
Sickness and incapability
You may have an employee who isn't capable of working due to illness or lack of skills and experience. If this is the case, you may choose to offer them a settlement agreement.
This is an option if both parties would prefer to go down this more amicable route, rather than going down the longer round of capability procedure.
Employee grievances
An employee may have a grievance against their employer regarding their treatment, leading to potential claims.
By offering them a settlement agreement, you can bring an easier ending to proceedings than going down the legal route.
Employment relationship breaking down
A settlement agreement may also be used if the working relationship between employer and employee has simply broken down.
If it's broken past the point of repair, you can offer an agreement to an employee so their employment ends.
This is a more amicable option and will hopefully avoid any further conflict between both parties.
What to include in a settlement agreement
It's important you know what to include in your proposed settlement agreement so you get it right. The following should be within yours:
- The identity of the parties involved.
- Confirmation of the employment being terminated.
- The financial details of the agreement, including taxation.
- Confidentiality, non-disparagement, return of company property and governing law clauses.
- Confirmation the dispute between employee and employer has been resolved.
Also, a clause that is typically included within agreements is that the company will pay reasonable legal fees and legal expenses incurred by the employee for obtaining legal advice.
Can you make changes to a settlement agreement?
Yes, changes can be made to the wording of a settlement agreement, during the negotiation phase
These changes must be agreed by both parties.
What can't be settled by a settlement agreement?
Not all conflicts can be settled by way of settlement agreement. So, it's important that you're aware of what issues can't be resolved this way.
For example, an employer can’t contract out of providing staff their statutory right to maternity, paternity and adoption leave.
Can employees ask for a settlement agreement?
Yes, employees can ask for a settlement agreement under employment law in Ireland.
However, most of the time these forms of agreements are started by the employer. As they are the ones that want to end employment.
Do employees have to accept a settlement agreement?
No, for a settlement agreement to be acceptable the employee must give full and informed consent. You must never apply undue pressure on them to sign.
Basically, you cannot force them to sign anything - you should give them a reasonable period of time to consider the agreement.
They should take appropriate advice before deciding whether to accept the agreement or not. If the agreement is not accepted, they can press on with a potential claim against you or your company.
Do settlement agreement solicitors need to sign the agreement?
No but the validity of the agreement may be challenged if the employee does not receive independent legal advice. Your employees should therefore take independent legal advice from experienced settlement agreement solicitors regarding their agreement. It's good practice to offer a contribution towards their advice, as legal knowledge is needed for such an agreement.
It's important both you and the employee are made aware of the consequences of signing a settlement agreement. To ensure the settlement agreement is legally binding, the solicitor who provided the employee with independent legal advice should sign the agreement.
Get expert advice on settlement agreements from Peninsula
Terminating someone's employment can be a stressful time for both parties. And this stress is heightened if it's ending on a bad note.
One way to resolve this issue is via settlement agreements. These agreements can help the dispute between employer and employee be resolved in an amicable way for both parties. So getting them right is highly important.
Peninsula offers independent legal advice which is available 365 days a year. Want to find out more? Contact us on 0818 923923 and book a free consultation with one of our HR consultants.
