Home Business Employment Law for Business What is a Settlement Agreement?

What is a Settlement Agreement?

A settlement agreement, is a legally binding contract which is typically agreed between an employee and their employer. While they can be entered into at any stage of an employment relationship, settlement agreements are generally used before termination of employment following a workplace dispute or grievance. Settlement agreements were previously known as ‘compromise agreements’.

Importantly, by signing a settlement agreement, the Employee waives certain legal rights, notably the right to bring a claim in the Employment Tribunal. The employee has to take steps to ensure the terms meet their requirements before signing the agreement.

The payment terms of the settlement agreement can vary according to the desired outcomes of the employee. Both parties may agree to either a termination of employment or continued employment. However, this must be agreed by both parties and include some key legal requirements.

There are mutual benefits for both parties to go down the route of a settlement agreement; for the employee, a job reference, quick and harmonious outcome, as well as being tax efficient according to the agreed payment terms. In turn for the Employer, it prevents reputation damage and potential legal claims.

Steps involved in processing a settlement agreement?

Before the process can begin, there are a few key considerations that both the employee and employer need to consider in preparing to negotiate:

  • This is a voluntary process which allows negotiation for both parties and may not always lead to an agreement.
  • The employee must seek an Independent legal adviser such as a solicitor to ensure validity and legality of the proposed agreement,.
  • Offers can be given orally or in writing, but for transparent purposes, writing is preferable, ensuring that there is no confusion over agreed terms.
  • During discussions, it is best practice for the employee to take a solicitor, friend, work colleague or Union rep into any negotiation meetings.
  • Both parties must be aware of the legal implications outlined further down in this post and the Employment Rights Act 1996, section 111A.

Discussions and reaching a settlement agreement

Key pointers for both parties to consider when negotiating the settlement agreement:

  • Agree the process for negotiations
  • Consider the timeframe for discussions.
  • Agree outcomes. For example, does the employee wish to terminate their contract or is this an ongoing workplace dispute aiming for continued employment?
  • Agree payment arrangements and be informed about any tax implications.
    Final agreement to be a formal written document.

Settlement Agreement Offer to include:

There are templates available, though the general rule of thumb is to include:

  • Reasons for the offer.
  • Identify payment to be made, legal fees incurred and if leaving employment, the remuneration for outstanding holiday, expenses and pension which would be the norm.
  • Include tax payments. Who will pay for this – employer or employee?
  • Identify if the Employee would like a reference (although this is not compulsory).
  • Decide when the Employer will pay the funds – normally as soon as the settlement is agreed.
  • If the outcome is for the employee to terminate their employment, both parties must agree to whether the employee works their notice.

Legal considerations with the Settlement Agreement

The Employment Rights Act 1996, section 111A outlines the implications for negotiations when undertaking a Settlement Agreement for both the employer and employee.

The following must also be considered:

  • Best practice according to Acas, there should be a minimum of 10 calendar days for the Employee to consider the settlement terms.
  • It’s a legally binding contract once it has been signed. Therefore, the employee is not permitted to make a claim to the Employment Tribunal or Court.
  • To be a written document.
  • The independent advisor is to sign a certificate to supplement the settlement agreement for it to be legally binding.
  • The independent advisor is to have Professional Indemnity Insurance or some type of insurance in case of a claim from the Employee.
  • The agreement must include key statutory provisions around such clauses as confidentiality.

Challenges

It rarely happens though if the employer reneges on the settlement agreement, the employee can progress a claim for breach of contract in the County or High Courts.
If an agreement is not reached, the Employer must be seen to be fair and abide by the ACAS Code of Practice on discipline and grievance procedures or this could lead to the employee making a claim of unfair dismissal.

Sometimes an employee may not start off with a settlement agreement, and may instead be offered this during a performance management or disciplinary process. If this is the case, it should be processed in separate discussions and paperwork

Benefits of a Settlement Agreement?

The benefits for both parties will be dependent on the circumstances and defined objectives which were driven at the start of the negotiations:

  • For the employer, this process will lead to a hopefully satisfactory financial payment and the risk of the member of staff leaving the company.
  • For the employee, it can lead to a cost effective, harmonious way of resolving a dispute with their employer.
  • If the agreement can be reached, it eradicates the need and expense of Tribunal claims and potentially end relationship on more amicable terms where both parties are satisfied with the outcome.

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