This Checklist sets out the key issues every business should consider before entering into a settlement agreement with an employee, and how an when to use settlement agreements. Settlement Agreements used to be called Compromise Agreements. The UK Government renamed them in July 2013 to promote a culture of trying to resolve issues within the company rather than at an Employment Tribunal. For example employers can now use the new Pre-Termination Negotiations which allow an employer to offer a settlement agreement for an employee to leave by following the ACAS Code of Practice on Settlement Agreements under section 111A of the Employment Rights Act 1996.
What is a settlement agreement?
A settlement agreement is a legally binding agreement between a business and an employee under which the employee agrees to settle their potential claims and in return the employer will agree to pay financial compensation. Sometimes the agreement will include other things of benefit to the employee, such as an agreed reference letter.
In what circumstances will a settlement agreement be appropriate?
- An employee can make a claim against a business under both their contract of employment and under statute. These claims may arise:
- on recruitment;
- during employment; or
- when their employment has been terminated.
- In many cases, a business may want to make a payment to an employee in return for an effective waiver of their potential claims. Businesses can enter into an agreement with an employee to settle potential claims when they are still working for the business, but in most situations, their employment will have ended (or will be about to end). Although it is usual for settlement agreements to be entered into where employment has terminated (or is about to terminate), it is possible to enter into one where employment is continuing. Unlike contractual claims, which can be waived by entering into a contractual waiver of such claims, statutory claims can only be waived in prescribed ways, one of which is by means of a compromise agreement Although it is usual for compromise agreements to be entered into where employment has terminated (or is about to terminate), it is possible to enter into one where employment is continuing. Unlike contractual claims, which can be waived by entering into a contractual waiver of such claims, statutory claims can only be waived in prescribed ways, one of which is by means of a compromise agreement.
What are the legal requirements for a valid settlement agreement?
For a settlement agreement to be legally binding, there are a number of conditions 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 (for example, a qualified lawyer or union official) on:
- the terms and effect of the proposed agreement; and
- its effect on their 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 for the advice.
- The employee’s adviser must be identified.
- The agreement must state that the conditions regulating settlement agreements have been satisfied.
Independent legal advice in settlement agreements: why does the employee need to see a solicitor when negotiating a settlement agreement?
Independent legal advice in settlement agreements is required because the employee is giving up legal rights and must be properly advised for any agreement to be legally binding. The same condition applied to compromise agreements, the previous name for settlement agreements.
Independent legal advice for an employee when dealing with a settlement agreement is vital for employers to ensure that such agreements are binding. It would prove a waste of time and effort for an employer to negotiate an agreement with an employee only to find it was not legally watertight as a consequence of a lack of independent legal advice to the employee. The requirement therefore provides protection for both employees and employers in this process.
Possible content of a settlement agreement
Other than the legal requirements listed above, the contents of a settlement agreement are largely at the discretion of the business and the employee involved. Examples of common clauses include:
- Compensation for loss of employment.
- Contribution to legal fees.
- Waiver of claims by the employee, including warranty that the claims listed are the only claims which the employee has against the employer.
- Re-assertion or modification of existing restrictive covenants.
- Indemnity from employee in relation to tax and National Insurance Contributions.
Protecting confidential information is usually crucial to a business and therefore settlement agreements often contain confidentiality provisions, for example, the employee agrees:
- Not to use any confidential information.
- Not to disclose any confidential information to any person, company or other organisation.
- To keep the terms and existence of the agreement confidential.
- To not make any derogatory comments about the employer (or any individuals employed by it) to a third party.
Which types of claim can be settled by a settlement agreement?
A large number of statutory claims can be settled by a settlement agreement, for example claims for:
- Unfair dismissal.
- Pregnancy or maternity-related discrimination.
- Discrimination, victimisation or harassment related to sexual orientation.
Which types of claim cannot be settled by a settlement agreement?
There are a number of statutory claims that cannot be settled by entering into a settlement agreement, including some types of:
- Personal injury claims.
- Pension claims.
- Claims following the transfer of a business.
For more information or queries about issues discussed in this article, please contact Abigail Oprey by email. To speak directly with Abigail or any other of The Legal Partners team of specialist business and HR lawyers based at our Richmond UK office, or our partner lawyers in Singapore or Guanzhou, please call +44 203 755 5288
This article explains the main legal issues and common situations to consider. It is not a substitute for legal advice. Please get in contact to discuss your particular issue or queries.