Employment – Settlement Agreements

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In every employment relationship, be it in the small firm or the very large or even global business, situations can arise, sometimes due to circumstances outwith the employer’s control, that can cause difficulties which can ultimately lead to the termination of the employee’s contract of employment.

In this article, we look at Settlement Agreements (formerly called Compromise Agreements) that set out the arrangements between the employer and the employee, usually on the termination of the contract of employment between them.

Whilst settlement agreements are widely used in redundancy situations, they can, in fact, be used in any situation where there is a dispute between the employer and the employee. They are also not the sole province of the employer – employees can also suggest that a dispute might be settled through the use of a settlement agreement.

Here are the key elements of a settlement agreement:

  • It forms a legally binding contract between the employer and the employee
  • The employee will waive his or her rights of recourse to an employment tribunal in respect of the issues listed in the agreement
  • The agreement must be in writing (and signed by both parties)
  • It usually contains some element of payment to the employee and it’s not unusual to include the requirement on the employer to provide a reference
  • it can be offered at any stage of the employment relationship, and
  • it is voluntary

As stated previously, settlement agreements can be used to bring any contract of employment to an end but they can also be used to settle disputes between employers and employees – for example, a settlement agreement may be used to settle a dispute about how the amount of holiday pay is calculated.

Once a valid agreement is entered into, the employee with then no longer be able to make a claim to the employment tribunal based on any of the items listed in the settlement agreement.

For the agreement to be binding on both the employer and employee, the following factors need to be satisfied:

  • it MUST be in writing
  • it MUST relate to a particular complaint of proceedings
  • the employee MUST have received advice from an independent advisor – a solicitor or a certified and authorised member of a trade union
  • the independent advisor MUST have professional indemnity insurance to cover any risk of claim by the employee in relation to any loss sustained as a result of the advice tendered
  • it MUST identify who the independent advisor is
  • it MUST state the applicable statutory conditions regulating settlement agreements have been met

Once the terms of the agreement have been reached, the employee needs to be given the opportunity to consider the terms of the agreement and seek out advice.

Settlement agreements are not compulsory – if the employer and employee cannot reach agreement as to its terms, then the employee cannot be forced to enter into it. Where the employer and employee are unable to reach an agreement, usually the discussions and the negotiations that were conducted during the course of trying to agree the terms of the settlement agreement cannot be used in any subsequent employment tribunal claim for unfair dismissal.

The solicitor providing independent advice to the employee on the terms of the settlement agreement may make recommendations for change in some of the terms of the agreement and the employee can ask the employer to make those changes – but the employer is not bound to do so.

A settlement agreement can have a profound effect on the employee’s future so if you find yourself in this positon, it is very important to make sure the terms of the agreement are correct and favourable. We have considerable experience in this field and are able to provide you with the help you need.

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