If an employer wants to terminate an employee’s employment, they may offer a Settlement Agreement to do so. Before 2013, Settlement Agreements were known as Compromise Agreements, but they amount to the same thing – a document that sets out terms by which the employee’s employment is terminated.
Once signed by both parties, they become a legally binding contract whereby the employee waives their rights to make a future claim against the employer in an employment tribunal.
In this comprehensive guide to settlement agreements, we’ll look at them in more detail.
What Is a Settlement Agreement?
A Settlement Agreement is an agreement between an employer and an employee that sets out agreed terms for the termination of the employee’s employment.
Generally, in return for agreeing to those terms, the employee will receive a sum of money above that to which they would usually be entitled and would waive their right to bring legal proceedings against their employer arising from the employment or its termination.
Why Are Settlement Agreements Used?
There are several reasons why Settlement Agreements are used at the end of employment. These include:
- To avoid potential legal disputes, which are time-consuming and expensive.
- To protect confidentiality on both sides.
- To provide a clean break for both parties.
- To avoid disruption.
When Are They Used?
Most employment claims can be settled via a settlement agreement including claims for unfair dismissal, discrimination and – to a certain extent – claims for personal injury. A Settlement Agreement will often be used when the employment is ending due to redundancy in order to avoid a lengthy consultation process.
Other examples of when Settlement Agreements are used include when Senior-level executives are leaving the company, or when the employee has potential claims that they could successfully raise in a tribunal, even where their employment is not terminating.
They can also be used to end legal proceedings that have already been commenced (although these are more often settled via ACAS and a similar instrument known as a COT3 agreement).
What Are the Advantages?
A Settlement Agreement can help bring a dispute to a close if other methods have not been able to resolve the issue. There are several advantages but, for both employees and employers, the dispute ends with a degree of certainty and the costs of employment litigation is avoided.
Employers will avoid time-consuming procedures within the organisation. They will save considerable time and costs in preparing for and taking part in employment tribunal proceedings. In addition, they can reiterate or include post-termination restrictions, obligations on confidentiality and even compel the ex-employee to provide assistance at future enquiries or legal proceedings.
Employees will usually receive a sum of money above that to which they would otherwise be entitled, and may have also agreed a specifically worded reference or announcement.
Additionally, similar principles apply to a shareholders’ agreement, which can be used to outline the terms and conditions between shareholders and the company. These agreements help in avoiding potential conflicts by clearly defining the rights and responsibilities of each shareholder, as well as mechanisms for dispute resolution, ensuring a smoother operational framework for the business.
Is a Settlement Agreement Legally Enforceable?
Settlement Agreements are legally enforceable as long as certain conditions are met. These include:
- The Settlement Agreement must be in writing.
- It must relate to a “particular complaint” (eg: unfair dismissal, discrimination, etc)
- Employees must receive independent legal advice on the terms of the agreement and its effect on their ability to pursue a claim against their employer from an independent legal adviser before signing it.
- The adviser must be independent of the employer, named in the agreement, appropriately qualified and have appropriate professional indemnity insurance in place.
- The agreement must state that statutory conditions regarding settlement agreements have been met.
What Can You Expect to See in a Settlement Agreement?
Not all Settlement Agreements are the same and the clauses they contain will vary, but some of the most common things you can expect to see included are:
- A Settlement Agreement may state that your employer will provide a reference -agreed wording is often annexed to the agreement
- If you are asked to take ‘Garden Leave’ to protect your employer’s commercial interests, the Settlement Agreement will state the terms of such an arrangement.
- An inclusion in the waiver of settlement of the particular claims and all potential claims, including future claims.
- A statement that the settlement excludes claims to enforce the agreement, latent personal injury claims and claims in relation to accrued pension rights.
What Are Contracting-Out Clauses/Provisions?
Contracting-Out Provisions are those stated to waive or vary certain statutory rights or entitlements that a party would otherwise have under employment/discrimination laws, Such clauses would generally be void unless they are contained within a settlement agreement or an ACAS COT3 agreement. Even so, there are certain statutory rights that cannot be contracted out of at all, such as statutory sick pay.
What Does Without Prejudice and Subject to Contract Mean?
Most Settlement Agreements are marked Without Prejudice and Subject to Contract.
- ‘Without Prejudice’ means the negotiations to settle the claims cannot be produced in a tribunal or court as evidence.
- ‘Subject to Contract’ means the Settlement Agreement must be properly executed. However, once the agreement has been properly executed, it becomes an open and binding document that can be used as evidence if, for example, one party breaches the terms of the agreement.
What Does Protected Conversations Mean?
As per Section 111A Employment Rights Act 1996, protected conversations may refer to ‘off the record’ discussions started by either the employer or the employee in relation to arrangements for the termination of an employee’s employment.
The rule means such the fact that such conversations have taken place (and therefore the content of those negotiations)cannot be disclosed in tribunal proceedings for unfair dismissal, except in certain cases, such as where there has been “improper behaviour”.
How Long Does an Employee Have to Consider a Settlement Agreement?
There is no set time limit for the consideration of the settlement agreement, but the employee must be given sufficient time to receive appropriate legal advice on the terms of the agreement and its effect on their ability to bring claims before an employment tribunal. A reasonable period is probably around a week, but some employers will impose a shorter or longer deadline.
Must an Employee Agree to a Settlement Agreement?
Employees don’t have to agree to a Settlement Agreement and employers can’t coerce or force them. However, if an employee feels they have been treated unfairly, the alternative recourse will be tribunal proceedings, following ACAS early conciliation.
Before agreeing to a settlement, the employee will need to consider the strength of their claims (the likelihood of succeeding), the sum offered in settlement and the costs involved in bringing the claim before the tribunal.
What Counts as a Fair Settlement?
Any payout agreed between an employee and an employer will depend on various factors, including:
- The reason for the termination.
- The employee’s contract terms.
- Both parties’ objectives, i.e., whether they want a clean break.
- Notice pay, holiday pay, loss of pension, etc.
An explanation of the payment will form part of the independent adviser’s advice to the employee.
What Happens if the Terms of the Settlement Agreement Are Breached?
If either party breaches a fundamental (important) term of the agreement, the other party can issue proceedings for breach of contract. The agreement often contains a clause safeguarding against an employee’s breach which provides for some or all of the payments made under the agreement to be reimbursed and a further undertaking by the employee to be responsible for any costs incurred by the employer in bringing such proceedings.
Company directors must ensure compliance with these agreements, as they are responsible for protecting the company’s legal and financial interests when disputes arise or settlement terms are violated.
Settlement Agreement Negotiations
It is in both parties’ interests to approach negotiations with an open mind so you can find some middle ground to work from. Do not try and force the other party to submit to your demands. The ACAS Statutory Code of Practice on Settlement Agreements is a recommended tool for employers to use during negotiations.
Whether you are discussing a Settlement Agreement with your employer or you are considering offering one to an employee, we can help. Contact our experienced Employment Law team to find out more by clicking here.
