What is a Reasonable Settlement Agreement?

At DPH Legal, clients who have been offered settlement agreements often ask us: “What is a reasonable settlement agreement?” The answer to this is that it depends entirely on the circumstances in which the settlement agreement has been offered to the individual.

If in doubt consult with a settlement agreement advisor on our legal team who will be able to help determine if your agreement is indeed reasonable.

If the situation is related to a redundancy, then payments to be made to individuals may differ considerably to situations which may be related to either performance, or allegations related to misconduct.

Important factors to consider

One of the most important factors which dictate what is a reasonable settlement agreement is whether or not the employer has followed a compliant process leading up to the offer of a settlement agreement to the employee.

Is there a claim for unfair dismissal?

By way of example, if the employer has elected to make disciplinary allegations to the individual but has failed to present those allegations correctly by gathering evidence an investigating the matter thoroughly, then there may be a breach which would give rise to a claim for unfair dismissal.

Dismissal for underperformance

If an employer is seeking to dismiss an employee for reasons of his or her underperformance without having followed a performance management process, then again, this may give rise to a flawed process and may increase the sums of money that should be offered under a settlement agreement.

Case circumstances

What is a reasonable offer will depend on all of the circumstances of the case. Some of the most important factors to consider are the length of continuous service for the employee as well as the salary, inclusive of all remuneration and benefits which apply to the employment.

Reasonable payments

The level of salary often dictates the level of payment which will be made under the settlement agreement and whether the offer should be considered to be reasonable. 

A reasonable settlement agreement offer typically includes payment of all contractual entitlements, inclusive of salary bonuses and other benefits up to the termination date.

In addition to this, one would expect a payment in lieu of any accrued but untaken annual leave as well as an ex-gratia payment which is the incentive for the individual to enter into the settlement agreement.

Ex-gratia and negotiation

The adviser’s focus is often on the ex-gratia payment because this is where negotiation becomes possible. In a situation where the employer has followed a flawed process or there is not a substantively fair reason to dismiss the individual, there arises the potential for a negotiated increase on the ex-gratia payment, paid under the settlement agreement. 

It is the legal adviser’s responsibility to advise the individual on what is a reasonable offer under the settlement agreement.

In order to advise the employee accordingly, the legal advisor will require all of the details in relation to the process which has been followed leading up to the offer of the settlement agreement.

The employee’s specific circumstances

The employee’s own personal circumstances will also dictate to a large degree whether or not the offer under the settlement agreement should be considered reasonable. By way of example, if the individual is likely to be out of work for a considerable period of time, it may be the case that he or she should negotiate an increase on the sums of money offered to compensate them accordingly.

Conversely, if an individual already has a job offer, then the losses which may arise from a claim arising from the termination of his or her employment may be reduced significantly and as such, a reasonable offer under a settlement agreement may be lower than it would be otherwise.

The legal adviser is obliged to sign a certificate as part of the completion of the second agreement process. The legal adviser should only do so, having advised the employee on whether or not the settlement agreement is reasonable. 

Whether or not the agreement is a reasonable one will depend not only on the financial terms of the settlement being offered under the settlement agreement, but all of the ancillary terms which apply to the termination of the employee’s employment.

Supporting terms of the settlement agreement

These ancillary terms can include confidentiality provisions terms related to restrictions including with whom the employee may work for going forwards, as well as reference wording. These ancillary terms may be just as important to an employee as the financial terms of the settlement agreement and in some cases, they may be more important. 

Clearly, an employee’s appetite to negotiate or engage in litigation against a former employer is also significant in determining whether or not a settlement payment is reasonable under a settlement agreement.

If an individual has legal funding to pursue a claim and is keen to enter into what could be a long winded process, then negotiating on the terms of a settlement agreement maybe more attractive.