Settlement Agreement Payments

Introduction to Settlement Agreement Payments

As specialist workplace solicitors, we file multiple employment law claims on behalf of employees and, conversely, defend various employment law claims on behalf of employers. By representing both employers and employees in employment law disputes, we have a unique perspective on the different motivating factors of both parties to a settlement agreement.

The world of work is an extremely personal one, and very often, when the trust and confidence between employer and employee breaks down, individuals can become very emotional, often motivated to score points, rather than resolve and settle any underlying dispute. A settlement agreement can be an efficient way of resolving that dispute.

What is a settlement agreement?

Settlement agreements go by a variety of names. There are often referred to as exit agreements, compromise agreements or severance agreements. However, whatever they are called, they provide a useful framework for parties to an employment dispute, to end and settle their issues in writing, without the need of often costly and protracted employment litigation proceedings.

Terms of a Settlement Agreement

There are a variety of factors that should be considered when drafting the terms of a settlement agreement. However, before either party comes to this point, the core question of how much an employee will be compensated, is usually first and foremost. 

The question we are often asked is, what is considered just and reasonable compensation in a settlement agreement?

This is a very difficult question to answer, as each case is different, with different levels of employee remuneration, culpability, and competing interests. However, we do have a useful framework, when considering what is considered a reasonable settlement offer, in the context of agreement negotiations.

1. Potential claim

Our starting point for considering what is considered a just and equitable settlement compensation amount, is to review what actual or potential claims might an employee bring in respect of any employment litigation proceedings.

For a majority of employees, the Workplace Relations Commission (WRC) will be the forum of choice to litigate their employment dispute. However, for a minority of employees, the civil court may be the preferred, or an additional forum for their claim, depending on the circumstances. 

In many instances, when filing complaints on behalf of employees, we file a complaint in the WRC in respect of any breaches of their employment law rights and also with the Personal Injuries Assessment Board (PIAB) in respect of any personal injuries, whether physical or psychological, suffered. 

Having clarity and certainly on the potential claim an employee can bring, is the starting point for our deliberation on any settlement compensation amount.

2. Likely Compensation

Having clarified exactly what claims an employee may bring, we then examine how much an employee might be compensated under the respective legislation, if successful in bringing a claim. However, it is important that employees do not conflate maximum awards permissible under the relevant legislation, with an award they are likely to achieve.

For example, the maximum payment an employee can achieve under the Unfair Dismissals Act is, in general, two years’ salary. However, it would be wrong for every employee filing an unfair dismissal claim to consider themselves likely to achieve anything near that amount. Ordinarily, an employee will achieve, if successful, compensation for any loss of earnings suffered.

By having a realistic estimation of a potential award, we start to gain more clarity on what a settlement agreement amount may look like.

3. Chances of Success

Very rarely does an employee always have a guaranteed successful outcome before the WRC or any other forum, despite their insistence. Even the strongest of claims can be robustly defended, giving an employer a fighting chance of success of winning the case outright, or at least mitigating their loss.

For that reason, it would be wrong for any employee to consider their claim to be bulletproof. 

However, if, having taken legal advice, an employee remains confident of their chances of pursuing a successful claim, their hand in negotiating a strong settlement amount is strengthened.

Having clarified what potential claims an employee can bring and their likely compensation range, we now have a more rational and informed basis for any settlement compensation amount.

Let’s take our example of the employee bringing an unfair dismissal claim. If that employee was dismissed without any due process or fair procedure, has been out of work for six months and has taken all the necessary steps to mitigate his/her loss, we could realistically propose that the settlement compensation amount, be close as reasonably practicable, to six months’ salary.

4. Cost of Proceedings

However, even with a seemly fool-proof case, and a strong likelihood of being awarded compensation, there will always be inevitable costs for the employee. 

The first costs are obviously legal fees. The legal fees will vary, depending on the experience and expertise of the legal team instructed.

There may be urgent financial pressures for the employee, that he/she would prefer to have addressed immediately. The financial circumstances of the employee may put them under pressure to seek an early resolution of matters.

There are always emotional costs for the parties concerned. Litigation, of any kind, is a stressful process, which can take a physical and mental toll. Can a price be put on peace of mind?

There are also reputational costs to be considered by both parties. In the age of the internet, and now public proceedings at the WRC, will an employee be comfortable with their name being associated with a complaint against their employer or former employer. For the employer, will proceedings before the WRC expose a poor workplace culture?

Finally, there are also commercial costs. Ordinarily, for the employer, the time spent defending employment claims can be disruptive to the remaining workforce. It can also prove a distraction for senior management. In most instances, the value of the time spent, if calculated based on the number of hours spent by staff preparing to defend an employment law claim, will very often exceed the amount of compensation that the WRC could, or may award in any event. Is it worth paying a settlement compensation amount to divest a company of an unwelcome distraction?

Conclusion

In summary, while we can provide some guidance as to what parties may consider when determining an appropriate settlement compensation amount, as a private agreement, it is entirely at the discretion of those parties to reach a final agreed sum. 

While money isn’t everything, it is important. Nonetheless, there are other factors to be considered in negotiating a settlement agreement, including the proposed termination date, the narrative surrounding departure, the narrative surrounding any dispute, non-derogatory clauses and whether or not the employee concerned will be given a reference, as applicable. In many instances, these individual considerations trump financial concerns for a minority of employees.

At Crushell & Co, we have extensive experience in advising parties on the negotiation and drafting of settlement agreements and severance payments. For more information on how we can assist you, please reach out using the contact details below.