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Settlement agreements are becoming increasingly common in employment law as a way for employers and employees to reach an agreement on the terms of an employee's departure. In this article, we will explore what settlement agreements are, when they are used and the benefits they can provide.
What are Settlement Agreements?
A settlement agreement (formerly known as a compromise agreement) is a legally binding agreement between an employer and an employee, which sets out the terms and conditions of a settlement. Settlement agreements are typically used to resolve disputes between employers and employees, but they can be used for other reasons, as detailed below.
The agreement will usually contain clauses that cover:
- The amount of any financial compensation to be paid to the employee.
- Confidentiality provisions.
- Post-termination restrictions (e.g. non-compete clauses).
- An agreement not to bring any further legal claims against the employer.
- An agreement to provide a reference.
When are Settlement Agreements Used?
Settlement agreements can be used in a variety of situations, including:
- Redundancy situations where an employee is offered a settlement package in return for leaving the company without the need for a potentially long and costly redundancy process.
- To resolve allegations of discrimination or harassment where the employer offers a settlement as an alternative to litigation.
- Employment disputes, where an employer and employee agree to resolve the dispute through a settlement agreement rather than going to the Tribunal.
- As part of a TUPE transfer to prevent employees transferring to the new employer (in this situation a more complex settlement agreement is required to adequately protect all parties).
- As part of a capability process to avoid the need for a costly and time consuming process.
- As a method to give an employee a sum of money as a, ‘golden handshake’ after a long period of service.
Benefits of Settlement Agreements
Settlement agreements can offer a number of benefits for both employers and employees, including:
Certainty - A settlement agreement provides both parties with certainty over the terms of the settlement, avoiding the risks and costs associated with going to the Tribunal.
Confidentiality - The confidentiality clause in a settlement agreement means that the terms of the agreement can be kept confidential, preventing any reputational damage to either party.
Control - Settlement agreements allow both parties to have control over the outcome of the dispute, rather than leaving it in the hands of the tribunal.
Cost-effective - Settling a dispute through a settlement agreement can be more cost-effective than going to the Tribunal, as it avoids the need for legal fees and the time involved in litigation.
Does the employee have to accept a Settlement Agreement?
No, the employee is under no obligation to accept a Settlement Agreement and should only do so, once independent legal advice has been obtained. If an employee doesn’t take legal advice on a settlement agreement, the terms contained will not be enforceable.
Why do employees need to take independent legal advice on a Settlement Agreement?
According to section 111A of the Employment Rights Act 1996, one of the conditions for a legally binding Settlement Agreement is:
“The employee must have received advice from a relevant independent adviser on the terms and effect of the proposed agreement and its effect on the employee’s ability to pursue that complaint or proceeding before an employment tribunal.”
If your employee doesn’t receive independent legal advice, then the Settlement Agreement is not legally binding. This is why you, as their employer, will usually pay for, or contribute towards the cost of your legal advice.
What will the legal adviser/solicitor do with the Settlement Agreement?
They will ensure that your employee fully understands the terms of the agreement that they are signing up to, and should take employee through the agreement step by step.
The legal adviser should also advise the employee on whether the amount they are receiving is enough to settle any claims that they will be giving up under the agreement. If the legal adviser believes that the employee is being under paid, they may negotiate an increase on their behalf.
Once your employee has taken advice on the Settlement Agreement and they are happy to agree to the terms, their solicitor will sign a letter confirming that they have advised the employee. Usually in this letter the solicitor will have to confirm that they have a policy of insurance in place to cover the advice given.
Conclusion
Settlement agreements can be a valuable tool for resolving employment disputes without the need for costly litigation or lengthy processes. They are also extremely useful for employers to ensure adequate protection is in place following the termination of the employee’s contract such as, in relation to restrictive covenants, confidentiality and the employees ability to pursue a claim against them.
For further information, contact one of our specialist employment solicitors on 01827 317070 or email employment@pickerings-solicitors.com
You can also access more information via our employment blogs here:
What is a Settlement Agreement?
