Important information

The information provided here is intended as introductory guidance only and should not be regarded as either legal advice, or complete for an employer’s particular circumstance.

When considering whether to use a settlement agreement, it is recommended that legal advice is sought. Importantly, employees must have their own independent legal advice as a pre-requisite for a settlement agreement to be binding.

What is a settlement agreement?

A settlement agreement is a legal document, a type of formal contract which can be used to end the employment relationship on terms mutually agreed between employer and employee. They can be proposed by either party, although often they are proposed by an employer.

Their main feature is that when both parties sign a legally binding settlement agreement, the employee is then prevented from making a claim against their employer on the specified matters that are included in the agreement in relation to their employment rights, like unfair dismissal. Settlement agreements do not eliminate the possibility of an employee bringing a claim but can dramatically reduce the likelihood and therefore provide a degree of protection for the employer.

Settlement agreements must contain certain terms and must be entered into under certain conditions, which are introduced below. They usually include some form of payment to the employee from the employer as compensation for their employment coming to an end and for waiving their right to bring a claim covered by the agreement.

When might you use a settlement agreement?

The short answer is, in many situations. The decision to offer a settlement agreement is dependent on each individual employment circumstance and so it is virtually impossible to be prescriptive. An example of when they may be used is to avoid drawing out processes such as performance improvement, disciplinary or redundancy.

Settlement agreements are often used simply for the employer’s comfort, to remove the risk of any potential future claims from an employee. They are often, but not always, used to settle threatened or actual claims, or live disputes on termination of employment between employer and employee.

Settlement agreements provide a clean and confidential break between employer and employee, that is clear and legally agreed, where both parties know where they stand. They offer a degree of certainty that is often lacking in other ways of termination of employment, for both employer and employee.

What is the process of entering into a settlement agreement?

First, if an employer is considering whether to use a settlement agreement, it is recommended that legal advice is sought. Consideration should be given to whether settlement discussions in the particular circumstance will be protected before making any opening offer. Once this is established, there should be discussion and negotiation entered between parties. Subsequently putting an outline of an offer in writing can help prevent misunderstandings.

Such negotiations are usually protected either as a ‘without prejudice’ conversation, or under provisions set out in the Employment Rights Act. Both rules prevent the existence and contents of settlement agreement negotiations from being disclosed as evidence in a court or tribunal.

The ‘without prejudice’ protection only applies in circumstances where there is an existing dispute between the parties such as a disputed disciplinary process or the threat of bringing a claim. Where there is an existing dispute the without prejudice rule steps in to protect conversations which are made in a genuine attempt to settle that dispute.

Section 111A was inserted into the Employment Rights Act in 2013 in order to expand the circumstances in which settlement negotiations would be protected. While section 111A does not require there to be an existing dispute, it will only protect conversations where the employee’s recourse if dismissed would be a claim for unfair dismissal.

Following any discussions and negotiations, if the parties wish to conclude a settlement agreement they will need to draw up a formal written agreement. Each settlement agreement will, of necessity, reflect the particular circumstance of its individual case.

What does a settlement agreement include?

For a settlement agreement to be legally valid the following conditions must be met/certain terms must be included:

1. The agreement must be in writing
2. The agreement must relate to a particular complaint or proceedings
3. The employee must receive legal advice from a relevant independent adviser, on the terms and effects of the settlement agreement, who should sign a certificate to confirm they have done so
4. The independent adviser must have current professional indemnity insurance covering the risk of a claim by the employee in respect of loss arising from the advice given
5. The agreement must name the adviser
6. The agreement must state that the applicable statutory conditions regulating the settlement agreement have been satisfied

Failure to meet all these conditions or include these certain terms means that the agreement will not be legally binding, and this would leave the employer open to potential employment claims.

As well as the above terms, other key details to be included are when the employment relationship will end, how much the employee will be paid and when will they receive it,  if the employee is working their notice or receiving a PILON instead and the inclusion of a reference.

What the offer consists of will be for each employer to determine in the light of the particular circumstance.

Does an employee have to accept a settlement agreement?

No, settlement agreements are voluntary and so neither party is obliged to agree or enter into discussions about a settlement agreement if they do not wish to. Equally if a settlement agreement discussion is entered into the parties do not have to accept the terms initially proposed and thus a degree of negotiation might take place until an agreement is reached, or either or both parties recognise no agreement is possible and the matter is rejected.

Remember…

Settlement agreements are only one way of handling potentially difficult employment situations. Not all disputes or problems in the workplace lend themselves to resolution in this way and employers should be careful not to rely on them as an alternative to good management.

Workplace problems are usually best resolved in open conversations, including through the use of processes such as performance improvement, disciplinary or grievance procedures.

Useful links:

ACAS Code of Practice on settlement agreements

ACAS settlement agreement guidance