What is a Settlement Agreement?
A settlement agreement (formerly known as a compromise agreement) is a legally binding contract whereby an employee agrees not to pursue Employment Tribunal claims against his/her employer. These agreements are commonly used to record an employee's terms of departure.
Why Would an Employee Sign a Settlement Agreement?
Typically, an employer offers a sum of money in excess of an employee’s legal entitlement (an enhanced payment) in return they ask for the employee to waive or settle all potential claims against the employer.
What are the Benefits of a Settlement Agreement?
Settlements offer the benefit of certainty and a clean break between an employer and his employee. They also provide an opportunity to clarify the severance arrangements for the employee:
- Termination Date
- Financial Package
- Can include an agreed reference
For the employer they provide:
· Guarantee that it will not have to deal with a future claim from the employee.
For the above reasons, employers often still ask employees to sign a settlement agreement even when the departure is on amicable terms and there is no threatened employment tribunal dispute.
When Might a Settlement Agreement be Offered?
There is no single situation which results in a settlement agreement. That said, an agreement is often offered when performance concerns, disciplinary matters are at issue or when a redundancy situation is imminent. It provides both parties the opportunity to avoid protracted and often painful dialogue.
Settlement agreements are also often offered when a grievance has been raised, something formally or even informally or when an employee is threatening to litigate.
Some businesses offer settlements as a standard practice; for example, a belt and braces approach to any terminating employee.
Does an Employee Have to Accept a Settlement Agreement Offered?
A settlement agreement is not binding until it has been reviewed and a certificate has been signed by a trade union representative or independent legal adviser.
Of course, an employee is under no obligation to accept a settlement agreement.
A 10-day Cooling Off Period
An employer sometimes produces an agreement completely out of the blue (see protected discussions) and will give an employee the opportunity to leave on amicable terms or face a more prolonged exit (often when disciplinary or performance matters are called in to question).
What Does the Settlement Agreement Look Like?
A settlement agreement is typically 8 - 10 pages long (although it may be more) and it includes the following pieces of information:
- The names of the parties.
- The agreed termination date and what happens about notice and holiday pay.
- The termination/compensation sum (typically ex gratia and can be paid tax free).
- The tax position is clarified. If notice is being paid in lieu then this will be subject to tax, but any enhanced payment or statutory redundancy payment up to £30,000 compensation may be paid tax free. A clause is usually included confirming that the employee will indemnify any unpaid taxes if HMRC investigate further.
- Confidentially obligations are often included whereby the parties agree to not discuss the terms of the agreement.
- A reference is typically agreed and annexed to the agreement. Any announcements to staff or external media can also be included in this agreement.
- Non-derogatory clauses are also typically included.
- The particular claims being waived are referenced and all other possible claims are listed in a schedule.
- An advisor's certificate is annexed to the agreement or the advisor is made a party to the agreement and signs to confirm that the employee has been advised that by signing the agreement the employee appreciates that (s)he cannot pursue any employment claims in the Employment Tribunal against the employer.
For a valid and effective waiver of statutory, contractual and common law employment rights, certain statutory conditions must be met:
- The agreement must be in writing.
- The agreement must relate to a particular complaint or particular proceedings (often every imaginable claim is listed).
- The employee must have received independent legal advice on the agreement and in particular on its effect on their ability to pursue the statutory rights in question.
- The adviser must be identified in the agreement.
- The agreement must state that the conditions regulating settlement agreements in the relevant legislation have been met.
Which Types of Claim can be Settled by a Settlement Agreement?
Only certain statutory claims can be settled by a settlement agreement. These include claims for:
- Unfair dismissal;
- Discrimination, victimisation or harassment related to age, disability, gender reassignment, marriage and civil partnership, pregnancy and maternity, race, religion or belief, sex and sexual orientation; and
- Equal pay.
Which Types of Claim Cannot be Settled by a Settlement Agreement?
There are several statutory claims that cannot be settled by entering into a settlement agreement. These include some types of:
- Future personal injury claims (which have not yet arisen); and
- Claims for failure to inform and consult in connection with collective redundancies and on a transfer of a business.
Fees for Settlement Agreement Advice
Your employer generally pays a fixed amount towards the legal fees of between £250 and £750 plus VAT. This amount is normally sufficient and so there is no extra cost payable by you unless the matter becomes complex and protracted. If this situation does arise we can always seek an increase in fees from your employer, but failing which you will be liable for any balance. You will be informed of this before any payment becomes due by you.
Disclaimer: This article does not contain a full statement of the law and it does not constitute legal advice. Please contact the Employment Law Team on 020 3743 0600 if you have any questions about the information set out above.