5 Key Elements to Include in Your Settlement Agreement

Creating effective settlement agreements prevents the stress and expense of lawsuits. Having an experienced and knowledgeable attorney can ensure that your settlement agreement is drafted so that it will be enforceable by the court.

However, it is easy for some elements to be overlooked in a settlement agreement. Here are some essential items to consider:

Consideration

Settlement agreements are often used as an alternative to a lengthy court battle. They are commonly thought to offer a quicker and cheaper resolution to issues between an employer and an employee. However, they can be complex and should be carefully drafted to provide both parties with desired outcomes.

Consideration is a critical element of contracts that requires something of legal value to be given up by each party for the contract to be valid. This can be anything from a promise to do something to a transfer of property or even money.

In the case of a settlement agreement, consideration usually includes a sum of money paid by one party to another. It may also include a reference and obligations for both parties not to damage each other’s reputation (either via social media or in person). The dates and frequency of payments should be stated clearly.

Mutual Assent

Mutual assent is an essential element in contracts and contract law. With it, contracts would be helpful as they cannot be enforced if one party freely agrees to its terms.

Mutual consent can be expressed or implied and is usually proven by showing an offer and acceptance. The offer can be bilateral or unilateral, and the acceptance can be verbal or written.

An employee may be required to have independent legal advice before signing a settlement agreement. This adviser can be a solicitor or, under certain conditions, a trade union official or worker at an advice center such as Citizens’ Advice. The adviser must have insurance covering the risk of a claim for giving bad advice.

Non-Disparagement Clauses

If fired or laid off, companies often ask employees to sign non-disparagement clauses as part of a severance agreement. These restrictions, which prevent you from badmouthing the company or revealing confidential information, can be enforceable if the company can prove your comments caused its monetary loss. However, thoughtful drafting can mitigate the risk and burden of mutual terms by including proper exceptions.

Non-disparagement clauses and non-compete and non-solicitation agreements are among the most common restrictive covenants in employment agreements. Overly broad non-disparagement provisions have been ruled unlawful by the National Labor Relations Board, so you should consult legal counsel before signing any such agreement. An experienced lawyer can help you negotiate a fair and reasonable non-disparagement clause.

Release of Claims

Including a release of claims as an element in your settlement agreement NJ is vital. This can ensure that the disputed matter won’t be brought up in the future. It can also save time and money and help parties avoid the emotional toll of litigation.

The scope of the releases should be negotiated with both parties. Releases can be drafted narrowly to waive only known issues or broad and encompass all potential future issues. California law (Civil Code SS 1542) allows the latter option, and using this language is generally advisable.

In addition to releasing claims, both parties may want to include terms that protect their reputation. One standard inclusion is the requirement that either party will not damage the other’s reputation on social media.

Taxes

The taxation of settlement proceeds is an essential element to keep in mind. In particular, when the nature of a lawsuit (e.g., employment discrimination) would generally result in taxable proceeds, but the claim also has a physical component involving personal injuries and sickness, carefully drafted language can direct which proceeds are paid on account of such injury and sickness, thereby excluding them from taxation.

In general, payments for emotional distress — often called “pain and suffering” — are not tax-free. To be tax-free, compensatory damages must be based on physical injuries or sickness.

The same goes for any payments made to your solicitor – those are taxable as earnings and subject to national insurance contributions. It is a good idea to include an explicit language clause in your agreement saying that the amounts paid are not taxable.