Anyone who has ever spent more than five minutes talking with an employment solicitor is likely to have heard the term “settlement agreement” crop up. This may be in the context of an employment tribunal claim, a possible redundancy or even the sale of a business. But what is a settlement agreement, and why is it important?
What is a settlement agreement?
In 1993, the concept of a “compromise agreement” was born. Introduced by legislation, this was a binding agreement between parties, usually employee and employer, to settle a case or agree to refrain from instituting or continuing with certain proceedings. Compromise agreements were renamed “settlement agreements” in 2013 (the government’s rationale being that parties are more willing to “settle” than to “compromise”, though clearly to reach a settlement one will nearly always be expected to compromise). A settlement agreement is one of only two ways in which an employee can validly waive certain statutory claims they may have against their employer, such as unfair dismissal, protection from discrimination and unlawful deduction of wages. The other requires an agreement via the conciliation service ACAS (a “COT3”), so settlement agreements tend to be used by most parties negotiating the terms between themselves.
Settlement agreements can be used at any time where there is, or could be, a dispute between the parties. Although settlement agreements do not necessarily terminate an employee’s employment, this is the most common reason for entering into a settlement agreement. They are also used to record the terms of a settlement of a tribunal claim. Under the terms of a settlement agreement, the employee will usually receive a payment (or other consideration) in return for agreeing to waive any actual or potential claims they have brought or could bring against the employer in respect of their employment or its termination.
Requirements of a settlement agreement
There are certain requirements for settlement agreements to be valid. For example, the agreement must be in writing and expressly state that the conditions regulating settlement agreements under the relevant statutory provisions have been satisfied. The agreement must also relate to a particular complaint or proceeding; it is not enough to state that the agreement settles all and any claims the employee may have.
For this reason settlement agreements will usually list all potential claims the employee may have against the employer. The employee must also have received legal advice on the terms and effect of the agreement, and in particular its effect on their ability to pursue any rights before an employment tribunal, from a relevant independent adviser who holds an appropriate contract of insurance or professional indemnity. The adviser must be identified in the agreement. As the agreement is not valid without this advice being given, it is common practice (though not obligatory) for the employer to provide a contribution to the employee’s costs in obtaining the advice.
What is usually included?
There are very few claims that cannot be waived under the terms of a settlement agreement, but there are certain restrictions. It is not possible, for example, to waive claims regarding accrued pension rights. Similarly, a clause waiving claims in respect of latent personal injuries (i.e. injuries that have already been suffered but of which the employee could not be aware at the time of signing) will generally be unenforceable.
In addition to the waivers regarding the employee’s potential claims, various commercial terms can be agreed within the settlement agreement. The standard inclusion is of course the termination payment(s), but other terms such as an agreed reference, additional post-termination restrictions or outplacement support are all commonplace. Employers can agree to allow employees to retain certain property otherwise belonging to the employer, such as a mobile phone or laptop (though provision should be made to ensure that confidential information is transferred or deleted from the device). Ex gratia payments made in settlement of claims can be paid tax free, up to a maximum of £30,000. It is normal therefore for the employee, being the ultimate beneficiary of the tax free element, to provide an indemnity in relation to such payments.
The existence and terms of the agreement itself should usually be stated as being confidential; employers are reluctant to set a precedent or indirectly encourage existing employees to hold out for a payoff. A breach of confidentiality may permit the employer to recoup the settlement sum paid (less any obligatory payments such as notice pay or accrued untaken holiday).
Discussing the settlement
Any discussions regarding a settlement agreement should be stated at the outset to be without prejudice. This will generally prevent the discussions being disclosed as part of any claim, and allows the parties to discuss the possibility of settlement without opening the risk of further litigation. However, there are certain exceptions and legal advice should be sought to ensure that the privilege is properly available and engaged.
Matthew Cranton - Employment & Immigration
This article was first published on 9 September 2016 as part of our Employment Law Update series. Register above to receive our updates as soon as they are published, directly to your inbox!
This article is offered for general informational purposes only, and does not constitute legal advice. The views and opinions expressed in this article are those of the author(s) and do not necessarily reflect the views or opinions of Solomon Taylor & Shaw.