Settlement Agreements: Cost of Legal Advice 

What do we already know?

Settlement agreements are often used to agree a settlement to a dispute with an employee, or bring an end to the employment relationship in an amicable way. An employee agrees to waive any claims against their employer in return for a compensation payment. In order for this waiver to be valid, an employee must have received independent legal advice on the terms and the effect of the settlement agreement.  Most employers provide a contribution to an employee’s legal fees in this respect – the amount of which varies and often reflects an employee’s seniority and the complexity of the arrangement.  Employer’s contributions tend to start from around £250 + VAT, which was the standard figure 10-15 years ago.  The most common amounts we see presently are £350 + VAT and £500 + VAT, with the latter figure fast becoming the new standard.

What’s new?

The EAT in Solomon v University of Hertfordshire (available here) said that £500 + 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.  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 to simply explain what the terms of the settlement agreement mean and not be interested in seeking advice on the ‘deal’.

Employers will be comforted to know that these remarks in the EAT’s judgment were technically non-binding, and the case does not set a precedent for employers being required by law to now bear the costs of legal advice on the merits and compensation on offer.  However, the EAT’s comments clearly provide an official indication that £500 + VAT should be seen as the minimum amount that is reasonable for an employer to offer in this respect.

Further, in its response to the WESC report on NDAs (see our update: Response to WESC Report), the Government said it was considering the extending the need for independent legal advice on settlement agreements to also cover concerns about NDAs.  Although the Government was clear that it will not require employers to meet the cost of that advice in full, it has stated that employers should ‘contribute appropriately‘ to these costs.

Whilst it is clear that legal contributions will currently remain a matter for employer and employee, employers may well see increasing pressure to up their contributions, particularly if they include NDAs.

Our view is that £500 + VAT is fairly reasonable as the minimum figure and employers should take this into account.  Achieving less than this should be seen now as the exception rather than the norm.