When employment relationships break down and it’s time for a difficult chat, it is often the case that an employer will consider entering into a settlement agreement with the employee. Settlement agreements usually terminate an individual’s employment and prohibit them from bringing proceedings against their former employer in respect of their employment. As part of a settlement agreement the former employee may be compensated for the loss of such rights. In order for a settlement agreement to be binding the former employee must seek independent legal advice as to the terms and effect of the settlement agreement, in compliance with s203(3) of Employment Rights Act 1996. It is common practice for the employer to contribute towards these legal fees. But what is a reasonable contribution?
In a recent Employment Tribunal decision (Solomon v University of Hertfordshire) the Tribunal expressed a view which may well result in additional cost for employers.
In the case, the employer had put forward an offer of £50,000 in settlement of various allegations, including discrimination. The employer had also offered to pay £500 + VAT to the claimant’s independent advisor to allow her to seek advice. The tribunal largely found against the claimant following the hearing (she received just £1,900) and ordered her to pay £20,000 towards the employer's costs (the most it can without a detailed costs assessment). It based this decision on the claimant's approach to various settlement approaches, including the above offer. The claimant appealed and the Employment Appeal Tribunal upheld her appeal. The EAT concluded that, whilst it would have been reasonable for the claimant to accept the offer, it was not unreasonable for her to refuse it.
Perhaps the most interesting part of the EAT's judgment related to the £500 contribution towards fees. The EAT said that the claimant could only be expected to receive advice regarding the terms and effect of the proposed agreement for the contribution offered. It said that any advice as to the merits of the claimant’s claim and any likely award of compensation should a settlement not be agreed would require a different scale of advice, for which £500 plus VAT was ‘wholly unrealistic’.
Whilst there is no obligation on an employer to pay for an employee's legal advice in relation to a settlement agreement, for the agreement to be binding the employee must obtain independent legal advice before signing it. This case is likely to be used by legal advisers acting for employees as a basis for seeking a higher contribution to their fees. The more complex the agreement, the more reasonable it will be to seek a higher contribution. Further, if an employer is seeking to settle a claim and wants to use any refusal as the basis for a claim for its costs, the contribution offered towards costs must be realistic and the EAT made it clear that £500 plus VAT in this case was wholly unrealistic.