Commercial - Settlement Agreements (former Compromise Agreements)

Tags: Compromise Agreement, Settlement Agreements

What is a Settlement Agreement? 

A 'settlement agreement' is a legally binding agreement following the termination of employment. It usually provides for a severance payment by the employer, in return for the employee agreeing not to pursue any potential claim in an employment tribunal. Quite often, the settlement agreement will also deal with the notice element in the contract of employment and may provide for a "payment in lieu". 

From 29 July 2013 the Enterprise and Regulatory Reform Act 2013 (ERRA) inserted section 111A to the Employment Rights Act 1996 (ERA) which allows employers and employees to have 'protected' pre-termination negotiations in circumstances of 'ordinary unfair dismissal' ONLY. However, where employers use "improper behaviour" such as threatening an employee with dismissal the contents of a section 111A ERA settlement agreement may become admissible during employment tribunal proceedings (further examples of improper behavious can be found in the ACAS Code for Settlement Agreements).

Employers are now increasingly using settlement agreements as a mechanism for preventing possible future complaints to a tribunal, especially in redundancy situations. 

Settlement agreements are recognised by statute. 

The employee must have the settlement agreement explained by an independent solicitor before the agreement becomes binding. The solicitor giving the advice must also sign the agreement and certify that the appropriate advice has been given.

What is the advantage of settlement agreements? 

For the employer this ensures that no claim will be lodged in the tribunal and for the employee they receive an ex gratia payment, compensating them for loss of office. 

Employers have started using settlement agreements in redundancy situations to prevent employees bringing an employment tribunal claim. If an employer does not comply with the law in making redundancies (perhaps through failing to consult properly, failing to use fair selection criteria etc) an employee can complain to a tribunal that the redundancy was unfair. If successful this could result in an award of compensation or even reinstatement. 

The only way an employer can ensure that an employee will not complain to a tribunal after redundancy is to persuade them to sign away their right to do so. This can be done in a settlement agreement and has the effect of turning the redundancy package into a "full and final" settlement of any claims the employee has against the employer.

Settlement agreements are also commonly used in employment situations other than redundancies and have the same “full and final” effect. Though employers using section 111A ERA settlement agreements must ensure that they stay within the limitations of such agreements.

What are the legal implications in signing a settlement agreement?

The most important thing to understand about a settlement agreement is that when an employee signs the agreement, they are deemed to have accepted the settlement terms offered by the employer. The employee is therefore waivering their right to bring a claim in a County Court or Employment Tribunal. 

What terms does a Settlement Agreement have to contain? 

The settlement agreement will usually contain clauses to cover the following issues: 

  • The full breakdown of the payments an employee will receive and the extent to which the sums will be paid free of tax. Usually, up to £30,000 compensation can be paid without deduction, but the employee will have to give the employer a tax indemnity within the agreement. 
  • Confidentiality clauses to protect the employer’s trade secrets, business affairs and the terms of the agreement. Employees may even be paid a small additional sum for entering into these. 
  • An employee will usually be required not to make any derogatory comments against the employer. Some employees prefer such agreements to be mutual, and employers are often receptive to such request.
  • Confirm the existing post-termination restrictive covenants that the employee will remain bound by the clauses under their contract of employment. Where an employee does not have post restrictive covenants in their contract and they are inserted for the first time in a settlement agreement, they will need to take specific advice on this as their ability to work for a competitor and/or service old clients and customers could be hampered after they leave. 

What claims will an employee still be able to make, once the agreement is signed? 

Generally, an employee will only be able to make three types of claim: 

  • A breach of contract claim if the employer breaches the agreement i.e. by not making the payments agreed; 
  • Personal injury claims are usually still allowed, although the agreement may exclude personal injury claims in respect of injuries of which the employee are already aware of at the time of entering into the agreement. This would usually be the case when the reason for termination is due to sickness absence for stress or depression.
  • Claims relating to accrued pension rights

Can an employee agree a reference with an employer?

There is generally no legal obligation on an employer to provide a reference. Any reference that is provided should be true, accurate and fair. If not, the employer may be guilty of misrepresentation. It is possible to incorporate a reference into a settlement agreement, in which case the reference becomes part of the agreement. 

Why does the employee need to take independent legal advice?  

Settlement agreements can be written in very legalistic language and can refer to sections of Acts and Regulations which an employee may never have heard of. To ensure they understand the effect of the agreement, it is a legal requirement that they get professional advice on it. 

How much will it cost me to seek legal advice? 

An employer usually will foot the bill for legal costs.

If you are an employer and need assistance with drafting and negotiating a settlement agreement please contact us on 0113 350 4030 or complete the enquiry form for a free telephone consultation. 

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