A Guide to Settlement Agreements under Irish Law

What is a Settlement Agreement?

A settlement agreement is a contract between two parties, confirming that neither party, has any dispute with the other. There should be some financial incentives for an employee to sign a settlement agreement, which we will examine later. 

Is a settlement agreement the same as a compromise agreement?

Settlement agreements often go by a variety of other names. They are sometimes referred to as ‘exit agreements’, ‘compromise agreements’, or ‘termination agreements’. However, their principal purpose remains the same, regardless of how they are described, to record the final and agreed terms between a departing employee and his or her employer.

Legal Impact of a Settlement Agreement

The main legal impact of a settlement agreement is that it will prevent an employee from bringing any future claim against the employer.

The consequences of such an agreement cannot be overstated, particularly if there is or was a dispute between the parties. 

Although a settlement agreement, is often intended to finalize any employment law dispute between the parties, an employee may also be waiving any other right they have, to bring any legal claim, against their employer. 

Very often, an employee may have multiple potential claims against their employer. Such claims could or may include claims for personal injury or defamation. Although the settlement agreement is intended to primarily relate to an employment dispute, an employee may be waiving all potential legal claims against their employer. 

An employee really needs to consider, whether the terms of a settlement agreement, are so advantageous, that they are willing to lose those potential legal rights.   

(Also see Compromise Agreements, the Workplace Relations Commission, and Independent Legal Advice)

Liability under a Settlement Agreement

A settlement agreement usually includes a clause, which alludes to the fact that the agreement is entered, by both parties, without any acceptance of liability, on either side.

What this means, is that, despite the potential or actual existence of a dispute between the parties, and the attribution of blame to either side, both parties decide, that for the purposes of the agreement, neither side shall attribute blame to the other, and that the agreement is being freely executed, by both parties, with their full consent and endorsement. 

Why agree to a Settlement Agreement?

The execution of a settlement agreement often comes down to a simple risk assessment and cost-benefit analysis.

For the employer, he or she will be looking at the likelihood of a case being taken against them, the chances of success, and a calculation of a potential award if the claim is successful. To insulate themselves from that risk, they may offer more favourable terms to the departing employee, in return for their agreeing not to pursue any claim or litigation against the employer.

For the employee, he or she may have a legitimate claim against the employer, however, there is never any guarantee of success, when one initiates a workplace claim, particularly before the Workplace Relations Commission. Therefore, he or she may also undertake their own risk analysis and cost-benefit assessment, to determine their own likelihood of success, in bringing a claim, the potential costs involved, as well as the likelihood of an award.

Furthermore, both parties will be cognizant of the legal and reputational costs, in bringing or defending a workplace claim or litigation.

For that reason, a settlement agreement is commonly referred to as a ‘compromise agreement’, in that neither party gets exactly what they want, but both have certainty that they avoid often costly, lengthy, and reputationally damaging litigation.

Settlement Agreements and Redundancy

In circumstances where redundancy is unavoidable, there is an onus on the employer to establish reasonable and objective criteria for redundancy selection and must apply such criteria fairly. There should be some objective criteria, against which employees are judged and appraised for redundancy selection. Furthermore, an employer must take into account any of the alternative proposals suggested by an employee, to avoid redundancy.

Even a well intentioned employer may fall short of these exacting standards, leaving some room for a claim for unfair dismissal by a redundant employee. A settlement agreement protects an employer from such a claim, helps maintains goodwill with the departing employee and improves morale among retained staff.

It is important to note that the statutory payment owed to a redundant employee is independent of any additional financial incentive offered under the terms of a settlement agreement.

Can an employee ask for a Settlement Agreement?

In the vast majority of cases, a settlement agreement is proposed by an employer, to the departing employee, whose employment, for whatever reason, has been terminated by that employer. 

Very often, an employer wishes to avoid potential disputes or negative publicity, and therefore suggests the execution of a settlement agreement. In return for a more lucrative parting financial arrangement, an employee agrees that he or she will not take any action against the employer, in the future. 

If an employee wishes to avoid a potential dispute with their employer, it may be tempting to request a settlement agreement as a means of resolving any issues between them. However, an employee would be best served speaking to a solicitor in the first instance, to determine what potential actions they may have against their employer, the likelihood of success, the cost of any potential action and what, as an alternative, a negotiated settlement may look like.

A solicitor will have the benefit of being able to open a negotiation on a 'without prejudice' basis, which may address some of the confidentiality concerns an employee may have.

What should be contained in a Settlement Agreement?

A settlement agreement will contain reference to the identity of the parties, the termination of employment, the financial terms of the agreement, taxation of the payment, confidentiality clauses, non-disparagement clauses, return of company property clauses, a governing law clause and most importantly, confirmation that the employee has no further dispute with the employer.

There may be additional clauses relating to the on-going cooperation of the departing employee and the provision of a reference. As a private agreement, it is entirely at the discretion of the parties to agree whatever terms are relevant to their own circumstances. 

What does ‘Without Prejudice’ and ‘Subject to Contract’ mean?

When a settlement agreement is often put before an employee, it is on the basis that, should the employee refuse to accept it, he or she will be precluded from relying on that proposal, in any form, in any future litigation. 

By marking the document has being ‘without prejudice’ and ‘subject to contract’, an employer prevents the proposal from having any legal standing, until such time as it is executed by both parties, thereby affording both parties, an opportunity to freely negotiate the terms of the agreement, without fear that their respective positions, can be used against them, if any dispute between them, isn’t settled throughout the negotiation process.

Until such time as the agreement is signed by both the employer and employee, it has no legal standing.

(Also see Settlement Agreements - What does 'Without Prejudice' Mean?)

Financial Terms of a Settlement Agreement

The financial terms of a settlement agreement are something that is entirely negotiable between the parties. As a private agreement, there are no legal prerequisites, as to what the financial terms of a settlement agreement should be. However, it is important, that the agreement provides for remuneration, beyond which, the employee would ordinarily be entitled to. 

There is no obligation on an employee to sign a settlement agreement, and should only do so, if the financial terms are favorable to them. It is therefore important, for both parties, to appreciate the consequences of the document they are signing. For the employee, it is crucial that they consider whether the compensation afforded, is commensurate with their proposed loss of legal rights.

Identity of the Parties

It may be taken for granted, but very often a settlement agreement incorrectly states the name of the parties to the agreement. In the vast majority of cases, where these issues arise, the name of the employer has been incorrectly stated.

Very often, an employer will have a variety of corporate forms, and it is critical, that the correct company, actually employing the employee, per their contract of employment, is listed as being party to the agreement.

If the employee has had a considerable amount of exposure to any of the affiliated companies of the employer, it may be useful to refer to those entities, to ensure that the right to a potential claim against those affiliates, is also precluded.

Termination of Employment under Settlement Agreement

Because a settlement agreement is marked without prejudice and subject to contract, it is very often, for the parties concerned, to determine what the public cause, of the termination of employment, will be. This can be of strategic advantage for both the employer and the employee. 

An employee will be afforded an opportunity to present a plausible explanation for their departure, to any future employer, while an employer, maybe in a better position, to mitigate the potential internal reputational impact, the termination of the employee concerned, will have within the organization.

In some instances, control of the narrative, can often be more important to the departing employee, then any financial terms.

Furthermore, in addition to financial remuneration, the employee may seek a reference from their employer.

Non-Disparagement under a Settlement Agreement

When an employee is departing a company on negative terms, it is often the case that the employee concerned will vent to friends and family. There is also a risk that the employee will make negative statements about their employer online or on social media. That employee, may in turn, be concerned about what is being said about them, internally, when they depart the company.

A settlement agreement will nearly always include a non-disparagement clause, within which both parties agree not to say anything negative about the other, after the execution of the agreement.

Taxation of Settlement Agreement

Virtually all settlement agreements, have a provision, which notes that the final payment will be made in the most tax efficient manner possible. Ordinarily, this means that the final amount to be paid to the employee, will, under a settlement agreement, have more value, than if that same amount were paid through salary. 

It is critical that any employee agreeing to a settlement agreement, obtain independent advice from an accountant, tax advisor, or Revenue, as to the financial implications of signing a settlement agreement. This is to ensure, that expectations as to the value of a potential settlement agreement amount, are grounded in reality.

Furthermore, before payment of the final sum, the employer should confirm, with the employee, any and all deductions, that will be made.

Independent Legal Advice 

An employee will be deemed to have freely entered into a settlement agreement, if they have been fully informed of the consequences of executing such an agreement. Therefore, in most cases, a settlement agreement will include a clause where in, the employer will afford the employee, and opportunity to have the agreement independently assessed, by their own solicitor. 

The employer will often make a contribution towards that independent legal advice. However, just because an employer is making that contribution, does not mean that the solicitor concerned, should be advocating the execution of the agreement. Independent legal advice, prior to the execution of a settlement or exit agreement, is designed to ensure that the employee concerned, is fully appraised, of the consequences of signing the agreement.

There are a number of questions that will be asked to determine whether informed consent was given.

(Also see Settlement Agreements and Independent Legal Advice)

Settlement Agreement and Informed Consent

The WRC will need to be satisfied that there was informed consent. Does the agreement advise the employee in writing to seek legal advice as to his/her rights and contain an acknowledgement that he/she had availed of such advice by signing the agreement? 

Duress to sign a Settlement Agreement?

Is there evidence of oppression or undue pressure being brought to bear amounting to duress? Did the employee have an opportunity to consider his position and avail of appropriate advice before signing the agreement and it was open to him to reject the offer and pursue a complaint to the WRC instead.

Did Employer and Employee execute the Settlement Agreement?

Ultimately, did both parties act upon the agreement with the employee paying over the ex gratia sum and by the employee accepting same. 

If each of these conditions are satisfied, the employee will be estopped from pursuing a complaint under and the WRC will not have jurisdiction to adjudicate on the substantive complaint.

Is a Solicitor's Signature or Stamp Required on a Settlement Agreement?

Not necessarily. Usually the evidence that an employee has obtained independent legal advice will be the invoicing of the employer, by the solicitor, directly.

A typical clause may note that 'the company shall pay the reasonable legal fees incurred by the employee in obtaining advice on the termination of their employment and the terms of this agreement, such fees shall be invoiced and addressed to the employee but marked as being payable by the company.'

Another sample clause would be to note who undertook the independent review of the settlement agreement, through language such as 'you confirm that you have had the opportunity to take independent legal advice from [insert solicitors name and firm here] in relation to the contents of this settlement agreement and the implications of the conditions contained in this settlement agreement.'

If the employee needs a witness to sign the agreement, a solicitor can indeed witness that signature. However, a specific request for the solicitor to sign or stamp the agreement, would be most unusual.

What happens if you don't accept a Settlement Agreement?

There is no obligation to accept a settlement agreement, and if you refuse to accept the terms offered, you will be able to pursue whatever potential claims you have against your employer, in the usual manner.

However, as with any dispute or litigation action, there will be no guarantee as to the outcome, and you may ultimately be awarded less than you were offered under the settlement agreement, even if your claim is successful.

In addition, you will be precluded from relying on the terms of the proposed settlement agreement in any subsequent dispute, if the agreement was marked 'without prejudice'.

Conclusion 

The termination of one’s employment, for whatever reason, is a significant occurrence in anyone's professional life. It is very often a difficult and emotionally charged period. 

Any employee considering executing a settlement agreement, needs clear and concise advice on the potential consequences of signing such an agreement. In order for them to be fully appraised, they need to know what their potential legal rights are. For that reason, we always advise, that employees obtain their independent legal advice, from a specialist employment solicitor, who is fully aware of all of the potential actions that an employee may take. 

Employee should know what potential complaints they may be in a position to raise, the likelihood of success, the cost of bringing such a claim, and the potential awards. It is only through an understanding of what the alternatives to a settlement agreement are, that an employee can be considered to be fully informed as to the consequences of signing that agreement and waiving their employment rights.