A contractual settlement agreement to resolve outstanding claims can be useful under employment law following a termination. This is particularly true if the employee does not wish to file a wrongful termination lawsuit, but the employer offers an amount of severance pay to avoid a potential legal dispute.
If such an agreement is reached following a termination, it is referred to as a settlement agreement.
In this article, we explain what a termination agreement or settlement agreement entails and what employees should keep in mind.
Termination Agreement, Termination Contract, Settlement Agreement: What’s the Difference?
In the context of terminations, you often hear the terms “settlement agreement,” “termination agreement,” and “termination arrangement.” But even though these terms may sound relatively similar or even identical, they do not mean the same thing.
Settlement agreements address the resolution of outstanding claims following the issuance of a notice of termination. Termination agreements are not preceded by a notice of termination; the mutual termination is an integral part of the termination agreement. In both cases, legal proceedings for protection against wrongful termination generally do not occur.
Termination Agreement
A termination agreement is a contract that employers and employees can enter into to terminate the employment relationship. Such an agreement can be concluded before a termination is imminent. A termination agreement offers greater legal certainty than a termination notice because, once signed, it is difficult to challenge legally.
In the case of termination by the employer, employees can and should have the legality of the termination reviewed by filing a claim for protection against wrongful termination with the competent labor court. However, since both the employee and the employer agreed to a termination agreement and both actively signed the contract, a judicial review of the termination of the employment relationship is generally not possible in this case. The only exception to this rule applies if, for example, the employee was coerced into signing under threat or by taking advantage of a situation of duress.
In these rare cases, a termination agreement may be challenged retroactively if the company obtained the signature by threatening immediate termination—a measure no reasonable employer would consider—such that the employee felt compelled to sign the agreement only under exceptional pressure during a performance review.
Instead of termination by the employer, the termination agreement can be used, for example, to shorten the notice period or to make further arrangements that may arise upon termination of employment. These include, for example, an agreement on severance pay, the overall rating in the employment reference, or compensation for outstanding vacation time or overtime; a period of leave without pay; a “blackout period” clause; and a “sprinter” clause.
Settlement Agreement
The settlement agreement, on the other hand, is concluded after the notice of termination has been given. The settlement agreement is also a contract that requires the agreement of both the employee and the employer, but it does not terminate the employment relationship. The employment relationship is still terminated by the notice of termination. The settlement agreement merely governs the settlement of the parties’ remaining mutual claims.
The settlement agreement typically stipulates, on the one hand, that the employee acknowledges the employer’s termination and effectively waives the right to bring an action for unfair dismissal. On the other hand, as with the termination agreement, an amount of severance pay for the employee may be agreed upon. Additional provisions may also be included, such as agreements regarding the employment reference and its content, the settlement of vacation entitlements, and the resolution of remaining claims—similar to those in a termination-by-mutual-consent agreement.
The settlement agreement usually makes sense only for the employer, as it allows the employer to proceed on the basis of a legally sound termination that the employee can no longer challenge through an action for unfair dismissal. The employer thus avoids the risk of protracted proceedings before the labor court.
Why a settlement agreement after termination?
The settlement agreement governs the details of the termination of the employment relationship, which has already taken effect as a result of the notice of termination. While the settlement agreement is primarily of interest to the employer for reasons of legal certainty, it can also be advantageous for the employee in certain situations. In particular, the time factor must be considered, as an unfair dismissal proceeding usually takes longer.
Settlement Agreement and Court-Approved Settlement
If no settlement agreement is concluded, the employee has the option to challenge the termination by filing a wrongful termination lawsuit.
Read more about the claim challenging a dismissal and the three-week deadline:
Deadline for a claim Challenging A Dismissal:
What You Need to Know!
In most dismissal protection proceedings, a court-mediated settlement is reached between the employee and the employer, which terminates the employment relationship. The settlement agreement usually contains the same or similar provisions as the court-mediated settlement. The clear advantage of a court-mediated settlement is that the claims set forth therein are generally enforceable and that there is no risk of a waiting period imposed by the Federal Employment Agency.
If, as an employee, you are certain that you do not wish to continue the employment relationship and can accept the terms negotiated in the settlement agreement, the settlement agreement can be a way to amicably resolve the consequences of the termination without filing a lawsuit.
In any case, employees who have been terminated and offered a settlement agreement should seek legal advice from a certified specialist lawyer in employment law. Such a lawyer can, for example, identify any potentially disadvantageous clauses in a settlement agreement. In addition, the lawyer can use their experience and skill to negotiate better terms with the employer.
When should you not sign a settlement agreement?
General protection against termination is a fundamental right under employment law. An employer’s termination is legally valid only if the employer has a reason for termination that is legally recognized as a social justification. If the employer does not have such a reason, or if the reason is not serious enough to justify termination, the termination would be invalid and the employee must continue to be employed.
To have such invalid and unlawful grounds for termination reviewed, one can file a claim for protection against wrongful termination against the employer’s termination. However, if one signs a settlement agreement following an employer-initiated termination, one waives the right to seek judicial review.
Even if the employer’s reason for termination was unlawful and could not justify the termination, signing the settlement agreement and waiving the right to sue transforms what was actually an unlawful termination into a lawful one.
By signing the settlement agreement, the employee effectively relinquishes their protection against wrongful termination in favor of a legally secure arrangement and “sells” the opportunity to challenge what might be a questionable termination.
For this reason, settlement agreements are usually only beneficial to the employer, as they allow for a legally sound termination and a swift conclusion of the employment relationship.
Read more about “Termination by the Employer: How to Respond Correctly!” in this article!
What happens to unused vacation time under a settlement agreement?
When it comes to what happens to remaining vacation time under a settlement agreement, you must refer to the specific terms of the agreement. For example, if you are irrevocably released from work during the notice period, this will usually be done by offsetting it against remaining vacation time and overtime hours. This means you no longer have to report to work during this time and can, for example, focus on looking for a new job, but your remaining vacation time will be used up in the process.
If no leave of absence is agreed upon or granted, the disposition of the remaining vacation days can be freely agreed upon in the settlement agreement. It is possible that you may still take—or be required to take—the remaining vacation days, or that you may agree to receive monetary compensation for them. The same applies, in this context, to the compensation or granting of time off in lieu for overtime hours.
Both termination agreements and settlement agreements carry the risk of a waiting period imposed by the Federal Employment Agency. This risk should be minimized with the help of a certified specialist lawyer in employment law by including a well-drafted clause addressing damages resulting from the waiting period.
We will review the options with you in the event of a termination, a termination-by-mutual-consent agreement, or a settlement agreement, and assist you throughout the subsequent negotiations.
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