Settlement Agreements

Settlement Agreements (formerly Compromise Agreements)

Sometimes, before a legal dispute has arisen with an employee, an employer may want to propose a termination of employment on mutually-agreed terms.  There are many reasons why an employer may wish to propose termination, typically it can be because of perceived poor performance, restructuring, a clash of personalities or for some other substantial reason. Managing these issues through the usual disciplinary, redundancy or capability process can often take considerable time and resources, and will not protect the employer from the risk of litigation and in some cases negative publicity.

Entering confidential pre-termination negotiations and utilising a Settlement Agreement to bring the employment relationship to and end for a financial settlement in exchange for the employee giving up their right to bring an employment related claim against them is often seen as a commercially viable option by many employers.

At Employment Law Services (ELS), our team of fully qualified employment law practitioners have drafted numerous Settlement Agreements for employers throughout the UK and have provided advice and support from pre-termination negotiations through to successful execution of the Settlement Agreement.

What is a Settlement Agreement

A Settlement Agreement is an agreement between an employer and employee to compromise an employee’s contractual and statutory claims on termination of employment (formerly known as a compromise agreement).

The effect of mistake on a settlement agreement can be problematic for one or more of the parties to that agreement. The possible consequences range from the mistaken party being bound by the terms of an agreement which it did not think it was making or the settlement agreement being declared void.

When entering into a Settlement Agreement there are certain conditions (which are set out in section 203(3) of ERA 1996, with corresponding provisions in other statutes) that must be met:

• The agreement must be in writing.
• The agreement must relate to a “particular complaint” or “particular proceedings”
• The employee must have received legal advice from a relevant independent adviser on the terms and effect of the proposed agreement and its effect on the employee’s ability to pursue any rights before an employment tribunal.
• The independent adviser must have a current contract of insurance, or professional indemnity insurance, covering the risk of a claim against them by the employee in respect of the advice.
• The agreement must identify the adviser.
• The agreement must state that the conditions regulating settlement agreements under the relevant statutory provisions have been satisfied

ACAS define settlement agreements as: “Documents which set out the terms and conditions agreed by those involved (the two parties) when they agree to settle a potential employment tribunal claim or claims, or other court proceedings.”

Who can be involved in settlement agreements?

Generally, it is an employer and employee/former employee who are the binding parties of a settlement agreement.

A settlement agreement can also be agreed between an employer and someone who is not an employee. E.G. an individual who has the right to bring a claim to the Employment Tribunal. Such as: a worker who has a dispute regarding holiday pay or an unsuccessful job applicant who has reasons to believe they were discriminated against during the interview process.

Key aspects of settlement agreements

• They are legally binding;
• They can remove an individual’s right to bring a claim to the Employment Tribunal;
• The employee/former employee generally gains a form of financial payment which is set out in the agreement;
• They are voluntary – a settlement agreement consists of terms and conditions agreed by both parties, they cannot be entered into if one of the parties disagrees;
• They are often reached through discussions and negotiations. In the first instance, one of the parties may not agree with one of the terms offered. In this event there may be a process of negotiations where both parties will make offers and counter offers;
• They are confidential – if the parties cannot reach an agreement, the negotiations may not be used in the Employment Tribunal or other court proceedings.

Why might two parties use a settlement agreement?

Settlement agreements are essentially used to terminate the employment relationship in a mutual and agreed way. ACAS describe them as often being used in “situations where an employer and employee feel that their employment relationship is no longer working and a ‘clean break’ is the best way forward.”

In addition, they are helpful when reaching an agreed and final conclusion to resolve a workplace problem or dispute which does not result in the termination of the employment relationship. E.G. Holiday pay.

What are the pros from an employer’s perspective?

• When an agreement has been reached, an employee cannot then go and pursue an Employment Tribunal claim, thus, achieving a ‘clean break’;
• The company avoids bad publicity that usually occurs when an employer has been taken to an Employment Tribunal, even if they have acted correctly;
• They help employers avoid spending large amounts of money defending their side at an Employment Tribunal;
• Allows the employer to remain on good terms with the employee.

What are the risks from an employer’s perspective?

• It would be viewed as dangerous if the employer offers the settlement agreement prematurely and the employee views this as ‘out of the blue’;
• If there is no alternative option given to the employee this may be deemed as a constructive dismissal. Thus, it is recommended to employers when issuing settlement agreements that they provide the employee with a range of options.