Understanding settlement or compromise agreements – ensuring employees realise the best possible outcome.
Chris Brunt is a Gibraltar employment lawyer a Barrister and Acting Solicitor who will consider all employment cases on a “no win no fee” basis.
I am frequently asked to advise employees as to the terms and effects of signing a ‘Settlement Agreement’, (otherwise known as a Compromise Agreement) when an employer is contemplating terminating (or has terminated) an employee’s employment. In fact, I act by providing legal advice almost exclusively for employees, including employees of Gibraltar’s largest companies. I am always independent of the Employer.
Why a Settlement Agreement?
Generally speaking, whether the proposed termination of employment is contemplated by the employer, perhaps due to a disciplinary or redundancy situation, a dismissal due to conduct or capability of the employee, or simply just a mutually agreed exit from the business. I find that by the time a realistic exit or settlement package is agreed upon by both the employer and employee, the employee is happy to close this particular chapter of their life and move on to better things. I have given a brief outline of the process below and importantly have made some observations towards the end in the final paragraph headed “Vital”.
Settlement Agreements, also known as Compromise Agreements are used by employers in a number of situations including genuine (and alleged) redundancy situations, or following disciplinary or anticipated disciplinary proceedings. Settlement agreements are also used where the employer perceives that there might be exposure to their business in terms of costs and/or reputation should the dismissal go wrong and they end up in the Gibraltar Employment Tribunal as a result. Settlement agreements, therefore, are mostly deployed when the employer/employee relationship breaks or is deemed to be irretrievably breaking down. All large Gibraltar businesses, for instance, Gaming Companies, use settlement agreements, (of varying lengths) as do medium-sized companies, and increasingly smaller businesses as well.
More than occasionally when a Gibraltar employer contemplates dismissing an employee, perhaps by way of redundancy, or maybe during a capability review process, or an investigatory, or disciplinary process, (or if an employee who has been dismissed brings a claim against the employer for unfair dismissal/discrimination/bullying) the employer will make the decision whether or not to attempt to extinguish the risk of potentially having to deal with a claim in the Gibraltar Employment Tribunal. This may be a pragmatic way, in their mind, of dealing with the issue by reducing their exposure to reputational damage and/or future legal and HR staff time/costs. The employer might attempt to do this by proposing, on without prejudice basis, to compromise the dispute, or future dispute, by entering into a settlement agreement with the employee (or ex-employee as the case may be).
Simply put, this works because the employee receives a sum of money from the employer, and in consideration of this sum of money the employee promises to waive all his rights to bring any claims against the employer. In fact, the employee has to make many other promises as well. I have mentioned the main ones below, but each agreement might contain different terms, so an employee will need to be alert as to what bargain they have to keep in return for any financial settlement.
Settlement agreements (or compromise agreements) in large businesses, such as Gibraltar’s Gaming Companies, are typically drafted by the employer’s lawyers and where the individual terms (normally the settlement payment) of the proposed agreement are agreed with the employer’s management in conjunction with their HR Department (Human Resources).
If however termination of employment is proposed by way of redundancy it is recommended that the redundancy payment calculated by an employer (and which will be inserted into the settlement agreement) is checked by the employee’s lawyer.
It is important to note that for a settlement agreement to have a binding effect in law the employee receiving the draft agreement will have to be advised by an independent lawyer in advance of signing the agreement. The independent Gibraltar employment lawyer in addition to providing legal advice to the employee will also have to sign and forward with the completed signed settlement agreement a legal advisor’s certificate certifying that the employee has been independently advised as to the terms of the agreement. Compare section 62(2) of Gibraltar’s Equal Opportunities Act.
The employer pays the lawyer (of the employee’s choice) for advising on the terms and effects of the settlement agreement.
The employer will agree to pay a set amount towards the independent employee’s lawyer’s fees for the legal advice given to the employee. The agreed legal fee allowance in most circumstances will cover the lawyer’s work on advising the employee on the law and explaining the effects of the settlement agreement to the employee, in other words, what the employee will receive financially, and what they can and can’t do once the settlement agreement has been signed by both parties. This fee is paid directly by the employer to the independent lawyer of the employee’s choice. However, if an employee requires lengthy work over and above legal advice as to the terms and effect of the agreement, for instance negotiating the exit package and/or proposing adding or removing terms of the employer’s settlement agreement, then the difference may have to be met by the employee.
Settlement agreement for redundancy?
Please note, that there are important, and slightly different considerations when a settlement agreement is proposed for an employee in conjunction with a termination of employment due to redundancy. For instance, is the employer offering a statutory redundancy payment, (calculated on the employee’s length of service, taking into account their age, and salary), or is it offering an enhanced payment over and above what is required by law? Or is the employee entitled to an enhanced redundancy payment due to their employment contract itself in any case? These are important considerations which the employee’s lawyer will discuss with his client as they can impact the terms and amount of the redundancy payment payable to them, and potentially, in certain circumstances, affect the necessity for an employee to actually need to enter into a settlement agreement with the employer?
Meeting with your independent legal advisor
In advising on a settlement agreement the employment lawyer would typically meet up with the employee and would explain line by line the effect of the (sometimes lengthy settlement agreement, which is of course a contractual document), the terms in the agreement, and which has been specifically drafted for each individual employee.
However, while the settlement agreement has been individually tailored to the individual employee concerned, it is true to say that large parts of the contractual legal text are standard. The individual deviations from the standard text normally (but not always entirely) include the important compensatory settlement/redundancy sum, as well as final salary payment, allowances for notice, and outstanding holiday pay.
While outstanding unpaid holidays and wages worked before termination of employment are an employee’s contractual and legal right and should not form part of any bargain from an employer. (in other words, an employee is owed these payments regardless of entering into the agreement or not) They are for completeness’ sake set out in the settlement agreement so as to remove any ambiguity of the total amount the employee will receive. If an employee is to be paid pay in lieu of notice they will also have this recorded in the agreement. It is important to note that all these sums are treated as salary and so will be subject to normal payroll deductions for income tax and social insurance.
Why sign a settlement agreement?
So then why do employees consider signing a formal legal agreement, what’s in it for them when they sign they sign away most, if not all, of their relevant legal rights. The reason is that the employer will offer what is known as an ex-gratia payment in return (but caution is required with statutory redundancy payments). This ex-gratia is effectively compensation for resigning/losing your job, or perhaps withdrawing a claim that an employee may have issued in the Gibraltar Employment Tribunal. This compensation award will be made without any admission of liability (of course!) and the aim is for it to be payable in addition to any contractual payroll sums owed to the employee as listed above.
Most, if not all ex-gratia compensation awards are made to the employee without deductions for income tax and social insurance. However, the decision as to whether or not is paid free of tax is made by Gibraltar’s Commissioner of Income Tax and not the employer. The settlement agreement, as drafted by the employer, will usually explain however that when both parties have signed the agreement the employer, will undertake to apply on the employee’s behalf to HMGoG’s income tax department to request that the ex-gratia payment can be paid to the employee free of tax.
The settlement agreement will also likely explain that in the event that the Commissioner of Income Tax, declines to accept the ex-gratia payments’ non-taxable status, or in some settlement agreements, if a decision from the tax department is not forthcoming within a stated period of time, then payment of the ex-gratia compensation payment will be paid out to the employee with tax deducted.
What sort of obligations will an employee be expected to keep?
In return for the ex-gratia payment, the employee will be expected to agree to waive all legal rights to any claims against the employer that they may have. Although there are limited exceptions to this (Please check with your independent employment lawyer providing the legal advice) the list of claims which cannot be brought against the employer is very long and comprehensive, and the net effect of signing the agreement is that an employee will have compromised any employment-based claims that they have, or may have had past and future. But there should be an exception for accrued pension rights, if applicable, and claims against the employer for breaching the terms of the settlement agreement itself should be added as an “excluded claim”, as should personal injury claims that the employee was not aware of, nor could they have reasonably been aware of, at the time the settlement agreement was signed by the parties. But as always, employees should check with their independent lawyer who will advise them, explaining what is and what is not included in the settlement agreement. This is because while agreements can be similar, they will by no means be identical.
A settlement agreement proposed by an employer will almost certainly require an employee to agree to refrain from making disparaging comments to third parties about them, and to keep secret the terms and existence of the agreement, and other confidentiality clauses. There might be restrictive clauses that attempt to restrict an employee’s ability to work for a competitor for a certain time. There will likely be uncontroversial terms requiring the ex-employee to return all company property in their possession and to refrain from holding themselves out as connected/employed with the company. There may be a section that deals with future references that the employer will provide, but if there are, such references simply tend to be neutral references just setting out the date range the employee worked for the employer and their job role etc.
It is not unusual for a term to be inserted that states that an employee who breaches any of the terms of the agreement will be liable to repay the ex-gratia payment on demand and further, to be liable for all the employer’s reasonable legal fees which they have incurred as a result of the employee’s breach.
Finally, just to add, it is usual for the employee’s lawyer to insist that the settlement agreement (and the subsequent Termination of Employment Form submitted to the Employment Department [Employment Training Board or ETB] records the reason for termination as “Redundancy” if appropriate, or by “Mutual Consent”.
This is of course a brief overview of the general framework of a typical settlement agreement that an employee might receive from their employer/ex-employer. There will be other terms inserted which will be explained by an employee’s independent lawyer when being provided with relevant legal advice.
Vital
If a settlement agreement is proposed by a Gibraltar employer then when an employee meets with their lawyer to discuss the terms of the proposed settlement agreement, it is vital that they explain any issues surrounding their proposed redundancy, exit or dismissal and/or any potential claims that they may have against the employer.
This is because the settlement ex-gratia amount proposed by an employer in their draft agreement may be wholly inadequate for a variety of reasons, including but not limited to such matters as the type of claim they may have against the employer, and also including the strength of any such claim (employment or discrimination or personal injury-related perhaps?)
In such circumstances, it is vital for an employee’s lawyer to be aware of any such issues.
This is to ensure that when giving the employee legal advice the lawyer can establish whether the employee is potentially under-settling when compromising their claim (which cannot be renegotiated once the agreement has been signed).
This is important as it may be the case that the employee’s lawyer should attempt a higher compensation settlement amount for his client by way of a counter-proposal to the employer.
This post is just an overview of the main features of the ‘usual’ settlement agreement and does not replace legal advice on a particular settlement or compromise agreement that has been personalised for you. Please bear in mind that there will be other terms (normally many other terms) which your independent legal advisor will individually explain to you when receiving a draft settlement or compromise agreement, and which may add to, or vary from, the explanations in the post above. As always, seek independent legal advice from a Gibraltar Lawyer.
Do you need legal advice?
Chris is an employment barrister and acting solicitor of the Supreme Court of Gibraltar who has vast experience in dealing with employee settlement agreements and would be happy in first instance to have a free half-hour, no-obligation, confidential discussion with you. Remember your employer will also offer to pay a fixed fee toward your lawyer’s legal costs should you enter into a settlement agreement. Call me on 200 73900 or email me at chris.brunt@phillips.gi
Chris Brunt is an Employment Law Barrister and Acting Solicitor of the Supreme Court of Gibraltar who specialises in Employment Law
Advice for Employees
Have you been provided with a draft settlement agreement by your employer and do you need to find an independent lawyer who will act in your best interest and advise you on the terms of the agreement? Perhaps, you wish to propose variations to the settlement agreement by adding or removing terms and you need a lawyer to negotiate on your behalf. Or perhaps you are unhappy at work and wish to speak to an employment lawyer to see what your options are. I would be happy to have an informal discussion to see how I could assist you. Contact me at Phillips Barristers and Solicitors, 292 Main Street, Gibraltar, GX11 1AA. Call me on 200 73900. Or email me at chris.brunt@phillips.gi
Advice for Employers
Perhaps you are an Employer looking for advice on drafting a settlement or compromise agreement for your business to limit your company’s exposure to a potential Employment Tribunal. Contact me for a free half-hour discussion to see how I could assist your business. Contact me at Phillips Barristers and Solicitors, 292 Main Street, Gibraltar, GX11 1AA. Call me on 200 73900. Or email me at chris.brunt@phillips.gi
All employee cases are considered on a “no win no fee” basis.
Disclaimer
All opinions are my own and are provided for information only and do not constitute legal advice. Please note that the information and any commentary on Gibraltar law contained in this article are provided free of charge for information purposes only. Every reasonable effort is made to make the information and commentary accurate and up to date, but I do not accept responsibility for its accuracy and or for any consequences of relying on it. The information and commentary do not, and are not intended to, amount to legal advice to any person on a specific case or matter. You are strongly advised to obtain specific, personal legal advice about your case or matter and not to rely on the information or comments on this site https://www.employmentlawgibraltar.com/
