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What is a settlement agreement in employment law?

Many employment disputes are ‘settled’ before they reach the Employment Tribunal. With the Coronavirus pandemic continuing to pose a challenge for businesses, many are facing having to make the difficult decision to let employees go. Our Employment Law team are witnessing a significant rise in individuals being offered settlement agreements by employers – but what exactly is a settlement agreement and how do you agree one?

What is a settlement agreement?

A settlement agreement (formerly called a compromise agreement) is a legally binding agreement between am employer and an employee in which the employee agrees to waive their right to bring certain claims to Tribunal. Often, in exchange for this, the employer will agree to pay the employee a sum of compensation.

When are settlement agreements used?

Settlement agreements are commonly offered to employees in the following circumstances:

  • You’ve been informed your role is at risk of redundancy
  • Your employer has raised concerns about your performance
  • You are on long term sickness absence
  • There has been a transfer of a business

A settlement agreement can also be used to resolve an ongoing workplace dispute. For example, if you feel your employer has discriminated against you, you may agree to receive a sum of money as compensation in exchange for not taking your employer to Tribunal. They are often used in claims involving:

  • Unfair dismissal
  • Breach of contract
  • Discrimination
  • Personal injury

Settlement agreements can be a quick and pragmatic way of resolving a dispute without the need for pursuing a Tribunal claim, which can be stressful and costly.

What do settlement agreements include?

Settlement agreements will often include clauses addressing:

  • The claims to be settled e.g. unfair dismissal; discrimination
  • Any payments to be made to the employee
  • Confidentiality
  • References

Things to consider before negotiating a settlement agreement

Before negotiating the terms of a settlement agreement you should consider:

  • Why is your employer offering a settlement agreement?
  • How likely is it that your claim(s) will be successful?
  • What remedy are you seeking?
  • Do you want to settle your claim(s) or is it more important to ‘have your say’ at Tribunal?

You may wish to instruct a specialist employment solicitor to advise you on the merits of your claim and the remedy you could expect to receive at Tribunal. This will help you to determine whether you should settle your claim.

Negotiating the terms of a settlement agreement

Once signed by all parties, the settlement agreement becomes legally binding. It’s essential to ensure that all issues, including those concerning outstanding pay or unpaid expenses, are resolved before the agreement is signed.

  • Compensation payments: a settlement agreement usually includes some form of non-contractual payment to the employee. You may wish to instruct a solicitor to help negotiate a higher amount than you are first offered.
  • References: If you’re leaving the company, it’s often a good idea to agree that a satisfactory employment reference is provided as part of the agreement; your employer does not have to provide one otherwise.
  • Confidentiality clauses: Your employer may want you to keep the terms of your agreement confidential. Make sure this is not unduly restrictive e.g. you can talk to your immediate family about the agreement.
  • Nonfinancial matters: The status of any grievances, disciplinary action and data subject access requests.
  • No bad-mouthing: Your employer may want you to agree not to make damaging statements about them. This is often fair, as long as the clause is mutual!
  • Timings: You should be given a reasonable time to consider any offer – ACAS recommends at least 10 days.

It’s important to note that you don’t have to accept the first offer made by your employer. A solicitor will be able to try and negotiate a settlement that best reflects the value of your potential claim(s)/any other outcome that you are seeking.

Is a settlement agreement legally binding?

Once signed by all parties, a settlement agreement will be legally binding if:

  • It’s in writing
  • It relates to specific claim(s) that you could bring against your employer
  • You have received legal advice from an independent adviser, who has relevant professional insurance
  • It states the name of your adviser
  • It includes a statement confirming that the agreement complies with these rules

A settlement agreement is not binding until you obtain independent legal advice on the terms. For this reason, most employers will contribute toward your legal costs. However, this sum is often limited and is usually just enough to cover a review of the agreement and advice on the terms of the arrangement.

It’s usually a good idea to obtain advice from a lawyer on whether or not the settlement is a good value, particularly if you have concerns about unfairness or discrimination in the redundancy process, for example.

If the advice given is that the financial sum offered does not adequately compensate you, this will put you in a stronger position to consider your options, including whether to negotiate an increase in the settlement sum offered. We frequently consult an addition to settlement sums on behalf of clients.

Once an agreement is legally binding, your employer will likely be in breach of the agreement if they fail to comply with any of the terms e.g. by not paying an agreed sum. If this is the case, you can seek a remedy for breach of contract.

How much will I receive from my settlement agreement?

How much compensation you receive will depend on the background and circumstances of the settlement agreement. Where you are offered a settlement payment in a redundancy situation, you should expect the settlement sum to include your contractual entitlement (such as notice pay and accrued annual leave) as well as any statuary redundancy payment you are entitled to.

Your statutory redundancy entitlement is based on your salary, age and the number of years you have worked for the employer. You can work this out by using the government calculator.

Additionally, the termination payment tends to include some form of compensation for the loss of your job.

Not all employees will be offered a settlement agreement and compensation payment on being made redundant. Where the employer is confident that there is a genuine redundancy situation and an employee does not have a realistic prospect of unfair dismissal or other legal claims, the employer is not bound to pay any more than the employee’s contractual and statutory entitlement. In such circumstances, the employer may make the payments without offering a settlement agreement.

Settlement agreements: our top tips

  1. If you’d like a reference – agree the wording with your employer and annex (attach) it to the agreement.
  2. It’s not all about the money – you may also be seeking alternative remedies, such as outplacement counselling. This may be useful if you have been made redundant, for example, to help you adjust to having to leave your job.
  3. Remember that settlement agreements are voluntary – you don’t have to sign anything that you are unhappy with!

Getting legal advice on your settlement agreement

In the current climate, some employees assume that they will be unable to obtain specialist legal advice on their settlement agreement prior to signing it. However, our experienced employment solicitors are fully equipped to remotely assist and advise employees with their settlement agreements. We can advise on the terms of settlement agreements and help to negotiate better conditions.

Settlement agreements can be signed electronically and returned to your employer. As such, not being able to meet face to face in the current climate won’t hinder this process.

If you are offered a settlement agreement and would like legal advice, please get in touch with our dedicated employment team on 0808 252 5231 or request a call back at a convenient time.

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