What is a Settlement Agreement?
A settlement agreement (formerly called a “Compromise Agreement”) is an enforceable arrangement between you and an employee whereby you agree to perform an action or hand out a severance payment, and, in return, the employee agrees to cease pursuing any employment tribunal claim. It has the effects of a legally binding contract.
Settlement agreements are normally reached in the hopes of ending an employment relationship in amicable terms, but they may also be drafted to end disputes related to specific terms and conditions, such as holiday pay or leave.
A settlement agreement could be offered by any one of the parties involved in an employment controversy at any stage, even amid a disciplinary or grievance procedure or as these approach their ending stages.
For assistance with drafting a settlement agreement or negotiating the terms of one, contact our settlement agreement solicitors on 0333 305 9375 today.
- What is a Settlement Agreement?
- Requirements for a Valid Settlement Agreement
- What are the Benefits of a Settlement Agreement?
- Are Settlement Agreements Always Confidential?
- Terms of a Settlement Agreement
- Settlement Agreements and Redundancies
- What Happens if a Settlement Agreement Offer is Rejected or Settlement is Not Reached?
- Get Professional Help
- Frequently Asked Questions
Requirements for a Valid Settlement Agreement
For a settlement agreement to be valid and legally binding, it must fulfil the following conditions according to UK employment law:
- The agreement must be laid out in writing and be, thus, “subject to contract” This is meant to protect both parties against arbitrary claims of supposedly binding oral agreements.
- It must be reached in response to a complaint (informal or formal grievance) or action. It must not be generic or mention “all claims”.
- The employee must receive independent legal advice – either through a lawyer, authorised official, employee, or trade union representative – on how to interpret the possible effects of the settlement agreement and the rights that would be waived as a result.
- The aforementioned independent adviser must have insurance covering any claims made by the employee on account of losses suffered following the advice given.
- The adviser must be identified in the text of the settlement agreement.
- The agreement must state that the statutory requirements regulating it have been successfully met.
- This agreement must be voluntary. You should not compel your employee to accept the agreement, nor should you issue dismissal threats for failing to accept a settlement offer. Furthermore, both parties should be free to question or reject any of the terms proposed by the other.
What are the Benefits of a Settlement Agreement?
Settlement agreements grant a series of benefits to both you and the employee, though they especially work in your favour. Let’s give an overview of some of these advantages:
Settlement agreements include a confidentiality clause that protects your business in a myriad of scenarios, though not every aspect of a settlement agreement is subject to non-disclosure or confidentiality terms, as we’ll see shortly.
For one, the employee is bound to not disclose any of the terms of the settlement agreement to other employees or customers unless you expressly authorise it.
Pre-termination negotiations can also be treated as confidential, irrespective of the existence of a current employment controversy or awareness that such controversy exists.
2. Improper Behaviour
Provided that there was no fraud, perjury, blackmail or undue influence involved, any behaviour deemed inappropriate during genuine settlement talks will be treated on a “without prejudice” basis. This effectively means that it can’t be brought up before a tribunal as evidence of any breach.
The “without prejudice” principle cannot apply in cases where there is no existing dispute between the parties.
3. Offers and Discussions
Offers of settlement agreements and discussions around them will also fall under similar protection, though, by contrast, this protection does transcend the existence of an employment dispute.
4. Avoidance of Possible Future Claims
You can invoke the terms of the settlement agreement before an employment tribunal if the employee decides to make a claim related to any of the subjects already covered therein.
For example, if the employee alleges that you did not pay sufficient compensation or commission, you can show that you paid the amounts set out in the agreement and that the employee waived his/her rights to receive any higher amount.
Needless to say, the controversy that prompted the settlement negotiations would be considered “resolved” once the parties have signed the agreement. Hence, any claims made regarding that same event would not be admissible as a general rule.
Are Settlement Agreement Conversations Always Confidential?
Initially, settlement agreements were deemed “protected conversations” in HR circles. However, this protection is only provided in limited situations.
The “protected conversation” concept (also known as “off-the-record” conversation) was introduced in employment law as a way to encourage both employer and employee to initiate settlement discussions without any prior dispute in the hopes of protecting both parties from any accusations of “claimable offence”, meanwhile stimulating free and honest discussions between them.
Nonetheless, in truth, conversations are confidential only insofar as there are no potential discrimination claims stemming from them.
For example, if the employee detected that you wished to terminate the contract due to a protected characteristic (e.g., pregnancy or old age), the details of the conversation can be disclosed in front of an employment tribunal, and you’d be held liable on account of unfair dismissal or possibly face discrimination claims.
Other “off the record” details that could potentially be raised before a tribunal are those concerning whistleblowing, health and safety issues and other similar ones that could be classed as an automatic unfair dismissal.
Finally, you’d want to avoid exerting undue pressure on your employee either via victimisation, bullying, intimidation, and/or harassment or by allowing little time for him/her to ponder on the terms of the settlement offer.
This is typically inserted in pre-termination agreements. It establishes the exact date when the employment contract will end. It can also refer to a period after which the contract could be considered expired. If the settlement agreement was post-termination, it merely declares the date when, according to the parties, the relationship ceased.
This termination date will hinge upon the notice period that the employee is entitled to.
In line with the term we explained above, the agreement will delineate the notice period granted to the employee in the original employment contract and whether they must work during those days. In practice, a PILON (pay in lieu of notice) is often arranged. If you’re dealing with an employee who’s known to be problematic, a PILON is probably your best option.
Grounds for Termination
The reason why the employment relationship ended has to be specified, though it’s good practice not to elaborate too much on this point and simply summarise it as “mutual agreement” unless the reason was unrelated to the employee’s performance or behaviour (e.g., if it was due to redundancy or impossibility to carry on with the relationship).
Compensation is possibly the most sought-after aspect of any settlement agreement. This compensation (which doesn’t include any contractual entitlements, such as “notice pay”) is known as ex gratia payment, as in, irrespective of any prior legal obligation.
This payment is free from any tax deductions or National Insurance contributions unless it exceeds £30,000, in which case the deductions and contributions will be calculated only based on the exceeding amount. This means that, for example, if the compensation amount is £30,100, the tax base would be £100.
Compensation payments must be made either in the next payroll or within the next 21 days after the settlement agreement is signed.
Considering the rather complex tax codes, you are in charge of paying the tax and NIC on behalf of the employee if there were any deductible amounts, according to HMRC.
Due Contractual Payments
Any amount earned and not paid would have to be included in the settlement agreement. This includes accrued holidays, benefits, bonuses, and unpaid salaries. Also, you’d have to check if the employee has the right to shares, stock options, and any deferred payments derived from share schemes.
Typically, payments you made towards your employee’s pension plan should cease upon the contract’s termination.
The trustee (pension company) is ultimately responsible for any accrued pension rights that the employee may have and they’re not strictly bound by the settlement agreement, as they were not even a party to begin with.
You’d still be obliged to pay into the employee’s pension fund until the expiration date of the notice period, even if you already arranged a PILON.
Return of property
The employee should return any company property (phone, laptop, office materials, etc.) placed under their custody within an allotted period, normally prior to the termination date. Notwithstanding, you may allow the employee to retain some assets if you so wish.
This is a term whereby the employee “warrants” being unaware of circumstances raised before the agreement that would have otherwise prompted you to issue a dismissal without notice. If you were to find out that the employee engaged in behaviour conducive to summary dismissal (such as gross negligence or misconduct) before the settlement agreement was signed, you reserve your right to withhold payments.
Upon signing the settlement agreement, the employee will waive any rights to make claims against you in the future due to unfair dismissal or breach of contract, save for any personal injury that they were unaware of up until that moment.
Employees are obliged to keep their settlement agreements private and should not even disclose their very existence. This notwithstanding the possibility of commenting, in general terms, on the reasons for their departure to future employers or immediate family members.
This will also not bar them from reporting more serious offences to the authorities or an employment tribunal, as hinted earlier. In addition, they can’t be compelled to conceal information that they may be legally demanded to provide or that ought to be entrusted to professionals in medical, legal, or similar fields so that they may carry out their duties.
The employee could ask you to provide a job reference. This reference could either be a factual reference or one containing a more personal note. The content of this reference will be attached to the settlement agreement draft.
This clause would prohibit the employee from making derogatory statements about you to a third party. Likewise, the employee may demand that you assume the same obligation.
Restrictive covenants are clauses mostly aimed at employees who have had access to confidential information about your business operations and who may take advantage of this knowledge to gain an unfair advantage. Under these clauses, these employees would be required to abstain from certain actions such as:
- Work for a competitor
- Contact any of your clients, customers, or contacts
These restrictive covenants are normally valid for a determined period after the contract’s termination, which ranges from 3 to 12 months, depending on the employee’s seniority.
If a restrictive covenant was already present in the employment contract, it’s highly likely that it will also end up in the settlement agreement.
Even though it’s not mandatory under current employment law, it’s always good practice to pay the employee a contribution (also called “legal fees”) so that they may obtain the aid of a legal advisor to review the settlement agreement. The quantity of this contribution might hover around the £250 – £500 range (plus VAT).
Breach of Settlement Agreement
Settlement Agreements are to include clauses pertaining to the consequences of breaching their terms. Possible penalties include reimbursement of any payments already made by the employer in accordance with the agreement and/or compensation for any losses that may have ensued from the employee’s breach.
Settlement Agreements and Redundancies
If you need to make 20 or more employees redundant within 90 days or less, you ought to consider the timescale and the legal demands that might flow from those actions.
Additionally, you may not be able to circumvent the collective redundancy threshold even if you managed to sign settlement agreements with these employees, for their underlying reason would still be “redundancy”. Read our guide on redundancy for employers.
For assistance with navigating settlement agreements or redundancy, get in touch with our expert employment solicitors. Call us today on 0333 305 9375 for immediate support.
What Happens if a Settlement Agreement Offer is Rejected or Settlement is Not Reached?
If a settlement agreement offer gets rejected, you may decide not to pursue any further action, but this is not conducive to a better work environment, so you may want to look for alternative ways to tackle the situation.
If the agreement offer was made during a disciplinary or performance management procedure, you can move on to the next stage and decide accordingly. Nevertheless, you should not let the failed attempt sway you in your decision-making progress, lest you get scolded by an employment tribunal in the scenario of an unfair dismissal claim.
You also have to remember to give the employee a fair disciplinary hearing and follow all the guidelines contained in your organisation’s handbook in tandem with the Acas Code of Practice on Grievance and Disciplinary Procedures.
Get Professional Help
Settlement Agreement discussions can get thorny, especially in situations that could end in the termination of the employment contract. One misstep could have you facing an onerous unfair dismissal claim or, even worse, charges.
For this reason, you may want to seek timely legal advice before it’s too late. Our employment solicitors have experience in helping employers and employees negotiate settlement agreements. Hence, we may give you a better purview of how both sides of the controversy usually handle these affairs.
Also, we are staffed with some of the most competent employment specialists thoroughly knowledgeable about the subject of settlement agreements. We’d be more than pleased to assist you with your settlement agreement.
Don’t hesitate to call us at 0333 305 9375 to discuss your needs or arrange a consultation appointment to discuss your options and way forward. You can also reach us via live chat or contact form.
Acas stands for Advisory, Conciliation and Arbitration Service. It’s an independent organisation that operates on public funds and is tasked with meddling in the affairs between employers and employees in the hopes of improving working relationships.
Employees who wish to file unfair dismissal claims must first notify Acas, and the latter will offer an “early conciliation” phase, which could end with a signed settlement agreement.
It’s not generally recommended to offer a settlement agreement (formally known as compromise agreements) if the offer is made “out of the blue” (without prior warning), as it could be swiftly rejected by your employee, and the working relationship may consequently go downhill.
Not only does this hurt morale and trust, but it can also lead to the disclosure of “without prejudice” correspondence and “protected conversations” via a formal grievance or, what’s even worse, an employment tribunal claim.
Acas recommends that you give the employee a minimum of 10 calendar days so that they may seek independent legal advice on how to understand the proposed terms. If you give any less than that, the employee could allege that you’re placing too much undue pressure.