What you need to know about settlement agreements

What are Settlement Agreements?

Settlement agreements, sometimes known as severance agreements or termination agreements, can be entered into when an employee leaves employment - for example, through dismissal or redundancy or when there is a dispute and the parties agree to a mutual termination of employment as a resolution of the dispute. The purpose is to settle any claims the employee may have upon their leaving.

Settlement agreements are a much simpler and stress-free way to settle a dispute compared to having to make or defend a claim that has to go through the courts or an employment tribunal. It is also advisable to issue a settlement agreement where an enhanced redundancy payment is being made or where a sum in excess of any legal requirement is being made to the employee, as you would not wish to pay more than is legally required and leave the door open for a claim to be issued.

They can also serve as a means of settling other types of employment claims (e.g. claims of discrimination or harassment – e.g. if your employer is advertising your job without telling you) irrespective of whether the employment relationship has ended.

Entering into a settlement agreement involves the employee signing an agreement promising that they will not bring any against the employer.  However, not all claims can be settled by way of settlement agreements (for example, failure to inform and consult in a collective redundancy situation).

Generally, a settlement agreement is the only way an employee can waive their rights to pursue their employment claims. However, an exception to this is when a settlement is reached following ACAS conciliation.

What are the advantages of a Settlement Agreement?

Settlement agreements are attractive to employers as they mean they do not have to worry about any repercussions such as employment tribunals and can also be desirable for employees as they may receive more in compensation that they are legally entitled to.

Settlement agreements can be considered tantamount to the employer ‘paying off’ the employee to ensure no claims are issued against them and a line is drawn in the sand.  They can also be a very amicable way to resolve tricky situations for both parties.

Another point in favour of settlement agreements is the ease and quickness with which they can be arranged, reducing the tumult for both sides and negating the need for legal action.

Examples of terms that a settlement agreement may contain include;

• An amount of compensation offered to the employee;
• Assurances given by both the employer and employee;
• Confidentiality about the fact of details of the agreement;
• The parties refrain from making disparaging and/or derogatory remarks about the other whether in writing or orally;
• Indication that all terms have been accepted by the employee and that they will not take legal action in future;
• A letter of reference which can be used by the employee in future job applications;
• An agreed announcement;
• A ‘non-compete’ clause which places some restriction on the type of jobs the employee is able to apply for in the future and an extension of the contract of employment;
• Payment of tax on the compensation;

How can a solicitor help me?

When a settlement agreement is drawn up, one condition is that the employee must have received advice from an independent adviser otherwise the agreement is not legally binding and does not settle statutory claims. This adviser should be a qualified lawyer (such as a solicitor or barrister), a certified trade union or advice centre representative, or a person of such description as specified by order.

It is normal practice for the adviser to sign a certificate or letter to confirm that they have provided the employee with advice on the terms and effect of the agreement upon them, as well as the effect of the agreement on the employee's ability to pursue claims before the employment tribunal. This certificate will also confirm that the adviser has the necessary insurance in place in respect of the advice given.

Ordinarily the adviser will provide advice on the amount of compensation that should be expected and the effect of the terms on the right to bring legal claims. The settlement agreement cannot be enforced unless the employee has received the required advice from an independent adviser.

Whilst not a legal requirement, is expected practice for an employer to provide a reasonable contribution to the cost of the employee’s legal fees. What is deemed reasonable is dependent on the seniority of the employee and the nature of the business. The contribution typically ranges from £350.00-£750.00 plus VAT.

What if I reject a settlement agreement?

The employee absolutely has the right to reject any offer of settlement, either on principle or because they feel the compensation offered is insufficient. In the case of inadequate financial remuneration, the employee can negotiate another settlement or pursue their claim to an employment tribunal/court.

The amount of compensation is purely down to the negotiation between the two parties and a solicitor can assist with negotiation of the settlement sum and the terms.

What are the time limits?

Regardless of any discussion around a settlement agreement, what you must bear in mind is that you only have three months less one day from your dismissal, date of resignation, date of discrimination to commence ACAS Early Conciliation, which is a step you need to take before you can issue a claim at the employment tribunal.  You then have one month from the date of your ACAS EC certificate to issue your claim at the employment tribunal.

DAS Law are seeing an increasing number of employment related issues and Settlement Agreements can be a much simpler and stress-free way to a resolution with your employer or an employee.