Settlement agreements are a common and effective way of bringing an end to employment relationships which, for one reason or another, are no longer working out. There are many benefits of using settlement agreements for both parties: the employee usually receives an unexpected sum of tax-free cash whilst the employer avoids a lengthy and complex exit strategy with the comfort of protection from future employment claims. The main downside for the employer is that settlement agreements incur an upfront cost.
One aspect of the cost which employers often overlook is the contribution they will make towards the employee’s legal fees. It is usual for the employer to contribute to the employee's legal fees, since one of the statutory conditions for a settlement agreement is that the employee has received legal advice on its terms. This condition is imposed to ensure that employees do not unwittingly waive their right to pursue a strong and potentially valuable employment tribunal case for a comparatively paltry sum. However, there is no statutory obligation on the employer to contribute to fees, and the amount of the contribution will not affect the validity of the waiver.
The going rate may vary depending on locality and complexity but is normally £250-£500 plus VAT. The recent Employment Appeal Tribunal (EAT) case of Solomon v University of Hertfordshire & Anor called into question the appropriateness of the standard contribution level and asked whether an employee could reasonably be expected to obtain sufficient legal advice on all of the facts and circumstances surrounding an offer of settlement for just £500. In this case, the Claimant refused a settlement offer of £50,000 pre-claim yet ended up with just £1,900 in compensation when she won her case – ouch! The Respondent relied on this refusal to argue that the Claimant had behaved unreasonably in order to support their application for costs against her. Her representative, who happened to be her husband, argued that she had refused because the £500 contribution to fees had been insufficient to obtain the necessary advice.
On this point, the EAT found in favour of the Claimant and held that such a contribution “would only relate to the terms and effect of the proposed settlement and its effect on her ability to pursue her rights thereafter” and if it was intended to cover more detailed legal advice, it was “wholly unrealistic”. On that basis, the Claimant had not behaved unreasonably.
The message for employers remains that contributions to legal fees are customary and should be proportionate to the complexity of the settlement. However, employees who require in-depth legal advice on the merits of their claims should expect that this will incur a cost in excess of their employer’s contribution. The moral of the story? Thank goodness for fixed-fee employment lawyers!