Settlement Agreements: How Much Should Employers Fairly Cover in Legal Costs?

Background

Settlement agreements are often used to agree an end to an employment relationship amicably. There are all sorts of reasons why an employer might offer an employee such an agreement – with the most common being associated to redundancies and employment disputes. Under the terms of a settlement agreement, the employee usually is expected to waive their rights to a claim against their employer – they will generally, not always, receive compensation in return. Regardless of the reasons for such an agreement, the employee must receive independent legal advice – and the employer would usually meet or contribute to the cost of the legal advice as they are effectively obtaining the benefit of the waiver in exchange.

The amount most employers will contribute to an employee’s legal fees can depend on various factors. This amount may reflect the employee’s seniority, the complexity of the exit, or their standard contribution, which should typically align with the standard market rate. Employer contributions vary significantly, and we frequently observe employers offering contributions that are woefully inadequate and outdated. Some employers attempt to offer a mere £250 plus VAT towards legal advice.

While this amount may have been the standard 10-15 years ago, it is now rare for a solicitor to review a settlement agreement, explain its terms and effects, and also be expected to provide advice regarding the merits of any claim an employee may have. More common contributions can also be in the region of £350 plus VAT but even these are very out of date. In these cases, we always urge employees to ask their employer for a more appropriate figure.

The Employment Appeal Tribunal’s View

The EAT in the recent case of

(2019), discussed employer’s contributions to settlement agreement costs. The EAT concluded that a figure of £500 plus VAT was a reasonable level of cost for advising an employee on a settlement agreement if the solicitor was simply explaining the terms and effect of the agreement; but that figure was ‘wholly unrealistic’ to also cover advising the employee about the merits of their claim and likely award of compensation – and therefore whether the settlement sum being offered by the employer was reasonable.

These observations were made in the context of an appeal against an employment tribunal’s decision on whether costs should be awarded against a claimant employee who had rejected a settlement offer from the employer after establishing liability in her claim. The legal fees offered were relevant to assessing the reasonableness of the claimant employee’s conduct and, consequently, whether costs should be awarded. Employers will no doubt therefore argue that the EAT’s comments were specific to the context of the particular litigation and do not directly translate to the appropriate level of legal contribution in a settlement agreement concluded outside the scope of litigation.

Our View

This case highlights that respondents must be realistic about the level of legal fees they should pay to encourage a litigant-in-person to seek advice not only on the terms and effect of a settlement agreement but also on the merits of any claim – the latter issue will likely take a great deal more time and consideration, warranting a higher cost contribution.

In our experience it is this latter advice that almost every employee will want to receive from their solicitor.

It is very rare for an employee to instruct their solicitor solely to explain the settlement terms without also seeking advice on the overall deal. The EAT’s comments suggest that £500 plus VAT should be seen as the minimum reasonable amount for an employer to offer in this regard.

Settlement agreements are increasingly being used as a ‘quick fix’ to bypass any formal process. We often hear that a settlement agreement came ‘out of nowhere’ with little or no evidence from the employer for the exit. We understand that a settlement agreement is often expedient. In such cases, our view is that the employer’s contribution to the cost of legal advice needs to be fair and appropriate. The employee should not be short-changed on the opportunity to get legal advice and fully understand the terms of any agreement and their options. Employers often forget that settlement agreements are voluntary.

Therefore, in more complex and high-value situations, a substantial payment towards the departing employee’s fees should be agreed upon. On occasion the split of the overall amount payable by the employer between the severance payment and the legal fee contribution may be negotiated so that the individual’s legal fees are met in full.

If the employee is generally satisfied with the amount offered, they only need to understand the terms and effects of the agreement. The employer also will not have to pay for the employee’s legal costs if the employee decides not to sign the agreement. However, disputes may still arise when basic contributions lower than £500 plus VAT are offered.

If you want an unrepresented litigant to accept an offer and intend to use their rejection to ask a tribunal to make a costs order, the amount you offer must be realistic. Employers should aim to cover reasonable legal fees for advising on whether the deal is good, as well as explaining the terms and effects of the agreement, without making it conditional on signing the agreement. The EAT’s comments may be used by those representing departing employees to support increased legal fee contributions. Employers need to be prepared to address these arguments in what is ultimately a commercial negotiation.

An amount in the range of £550-600 plus VAT more accurately reflects the real cost of 2 hours of a lawyer’s time. This is the average time required to advise the employee on the “terms and effect” of the Agreement, to get the agreement reviewed, agreed and signed. We’d urge employers to update their documents and legal fee contributions accordingly.

By Suraj Purohit.

Employment Paralegal at Kalra Legal Group.

04/06/2024