Legal fees and settlement agreements

Article Index
Overview


Now renamed - to little likely practical effect - as settlement agreements, what were known as compromise agreements enable employees validly to waive their statutory employment claims. Since a valid settlement agreement therefore protects the employer from claims, and the relevant legislation requires the departing employee to have taken independent legal or other qualifying advice on the terms and effect of the settlement agreement for that waiver of claims to be valid, it is normal for the employer to make a contribution to the legal fees incurred by the departing employee in taking the requisite advice. The issue of the amount of this legal fee contribution can end up being one of the most difficult, and sometimes even emotive, aspects of a severance negotiation - not least if it is one of the last issues to be resolved - and various factors contribute to the parties’ respective positions, and indeed the end result, of any negotiation over the issue.

Compromise agreements were introduced in 1993. The levels of legal fees contribution offered by employers at that time were anything between £150 including VAT and £500 plus VAT. It is still not unusual for an employer’s basic proposed contribution to be £500 plus VAT and sometimes less. This is often the case if the employer deals with independent advisers whom it recommends to departing employees on a regular basis and who are therefore familiar with the format of the employer’s standard settlement agreement. A tax concession ensures that the fee contribution is not taxable provided that it is paid direct to the legal adviser pursuant to a formal agreement to this effect. Hence, as part of the severance arrangements and to ensure that the payment of legal fees falls within the terms of the tax concession, the employee’s lawyer will usually be expected to supply to the employer a copy of the lawyer’s invoice to the employee marked payable by the employer as a condition of the agreement and of payment of the fees in question. 

The employee may argue that his or her departure is not of his or her making and therefore the overall value of the proposed termination package should not be diminished by having to foot the bill for legal fees which should never have had to be incurred in the first place, for example where the individual argues that dismissal is unfair. On this basis the individual will seek full reimbursement of the relevant legal fees. 

The employer may argue that all it is appropriate to pay for is the basic legal advice on the terms and effect of the agreement required for the waiver of statutory claims to be valid, i.e. advice on its terms and effect in precluding the individual from being able subsequently to present the relevant statutory claims to the employment tribunal. On this basis, a low level of contribution is argued to be appropriate for what is treated by the employer as a straightforward matter and the employer takes the position that the balance of any legal fees on wider commercial or drafting points should be down to the employee to settle. 

Employers may well be wary of opening themselves to very significant additional payments by agreeing to meet legal fees in full and may also consider that they should avoid the position where, in terms of perception if nothing else, they are paying the employee’s lawyer to negotiate against them. No employer, sensibly advised, would agree to an open-ended liability either at the outset or conclusion of negotiations. Consequently, a specific limit is usual rather than any agreement to pay the legal fees reasonably incurred by the individual, which begs the question of what is reasonable. There is of course always a risk of dispute over what is reasonable if the employer’s contribution, whilst capped at an upper limit, is still subject to a requirement that the fees be reasonable. For the employer to adopt the approach that it makes a specific fixed contribution without exception may assist in negotiations, especially where numerous agreements are signed as part of one exercise. Such an approach may not, however, be practicable in more complex and sensitive cases.

The question of the appropriate legal fee contribution in respect of a severance agreement will ultimately in many cases be a matter of commercial negotiation. Employers need therefore to consider carefully their approach to the issue of the legal fees payable in relation to compromise agreements - if only to avoid last-minute difficulties and delays in severance discussions which may need to be concluded speedily in both parties’ interests.


 

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