When an employee is first presented with a settlement agreement, the first question that is often asked is what is a settlement agreement?
Up until the 29th July 2013, Settlement Agreements were formerly known as ‘Compromise Agreements’.
A Settlement Agreement is an agreement between an employer and an employee which both parties enter into voluntarily in order to resolve a dispute between them and/or end the employment contract on agreed terms. Once signed by both parties, then at that stage the agreement becomes contractually legally binding. Most Settlement Agreements typically result in the employee receiving a lump sum payment in return for giving up their job and agreeing not to pursue Employment Tribunal or Court action.
The main benefits for an employee in resolving the dispute by way of Settlement Agreement are:-
- A lump pay off often worth more than the statutory minimum that they would otherwise be entitled to in that particular situation
- As part of the agreement, employers often agree to provide an agreed reference to prospective future employers
- Resolution by way of Settlement Agreement avoids the risk of losing a case at an Employment Tribunal or in Court.
The main benefits for an employer in resolving the dispute by way of Settlement Agreement are that it prevents the dispute from escalating to a costly Employment Tribunal claim or court action later on.
Common situations in which an employer may decide to offer an employee a Settlement Agreement include:-
- A redundancy situation
- Where there are allegations by the employer of poor performance
- Where there are allegations by the employer of misconduct, or even gross misconduct
- A dispute over pay, holiday pay, expenses, etc
- A grievance raised by the employee
- Working conditions, health & safety issues, etc
In order to facilitate discussions about the potential terms of a Settlement Agreement without fear of the details of those discussions being revealed later in legal proceedings at Tribunal or Court, the discussions are usually treated as being ‘without prejudice’ and as ‘protected conversations’. For the discussion to be treated as a ‘protected conversation’, then the following requirements must be met:-
- The purpose of the discussion must involve settlement negotiations. The negotiations must also be a genuine constructive attempt by both parties to reach agreement. That is, an employer cannot just say: “resign or be dismissed”. If an employer did go in to the discussion with that attitude, then the discussion would lose its protected status and the employers improper conduct during the discussion could then be referred to later during an unfair dismissal claim.
- The discussion must not be used as a forum for subjecting the employee to improper criticism. Again, the discussion would lose its protected status, thus allowing the employee to raise a grievance. The employee would also be able to refer to the grievance in later legal proceedings.
- Protected conversations only apply to unfair dismissal claims, with the exception of automatically unfair dismissal cases (e.g. whistleblowing). Hence, they do not apply to discrimination claims or breach of contract cases.
What Are The Requirements For A Legally Binding Settlement Agreement?
For a Settlement Agreement to be legally binding, the agreement must meet the following conditions:-
- It must be in writing.
- The agreement should specifically state what dispute(s)/issue(s) it is settling.
- The employee must receive independent legal advice upon the Settlement Agreement (i.e. such as from the employee’s solicitor). The agreement should state who the adviser is, the adviser should confirm within the agreement that they have provided the advice, and the adviser must have insurance/professional indemnity which covers them against the risk of a claim by the employee from loss arising out of the advice provided.
- The statutory conditions regulating settlement agreement must be met, and the agreement should contain a statement within it to confirm that they have been satisfied.
