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Settlement Agreements

Settlement Agreements

Employment law solicitor Natalie Ruane explains settlement agreements.

Settlement agreements (or compromise agreements as they used to be known) have been around for some time.  They are used in a variety of situations but are most commonly offered by employers when the employment relationship is being terminated in circumstances where the employer feels the need to protect their position, perhaps because the employer is at risk of being seen to have acted unfairly or outwith procedures, or because the employer is aware of factors or complaints made which may lead to a belief that the employee may have grounds for, or be minded to, bring a claim, or just because the employee is being given a sum of money on termination as a goodwill gesture and the employer wants peace of mind in return.

At its simplest, a settlement agreement is a contract under which an employee agrees to give up his or her right to bring claims against his or her employer in exchange for a sum of money from that employer.

Contractual claims can be settled under any type of agreement provided the employee receives something of value (known as "consideration") in exchange for having given up their right to bring a claim.  However, in order to prevent unscrupulous employers pressurising workers into signing away their rights to statutory claims such as unfair dismissal, pay claims and discrimination claims, the law states that any agreement which seeks to do so will be void unless it is:

  • agreed through Acas using what is known as a COT3 agreement;
  • reached following arbitration under the Acas arbitration scheme with the assistance of an Acas conciliation officer; or
  • recorded in a valid settlement agreement.

For a settlement agreement to be valid it must:

  • be in writing;
  • relate to a particular complaint or proceedings;
  • be signed after the individual concerned has received advice from a relevant independent adviser (ie. a qualified lawyer, a trade union official or other certified advisers), who must be covered by a current contract of insurance or professional indemnity;
  • identify the adviser; and
  • state that the statutory conditions regulating settlement agreements have been satisfied.

If the employee is induced to enter into a settlement agreement by false promises or misrepresentations, the agreement will not be binding even if the above criteria have been complied with but, generally speaking, if all the conditions set out above are satisfied then the individual signing will have given up his or her rights to bring the claims specified in the agreement.

Although the aim for the employer is a completely clean slate, there are some issues which cannot be waived under a settlement agreement: for example, accrued pension rights and some personal injury claims.  In addition to that caveat, a settlement agreement which merely states that all possible claims are being waived could be invalid.  This makes it very risky to have a standard settlement agreement that is used in all cases. Instead, case law suggests that each settlement agreement should be tailored to the particular circumstances of the individual who is leaving.  It should include descriptions of the claim or possible claims that the agreement is primarily seeking to deal with and should only ask the employee to waive claims which he or she has or feasibly could have against the employer.

Having said that, to give added protection to the employer, it is common for settlement agreements to include a warranty (a legally binding promise) that the employee does not have any claims other than those specifically mentioned in the agreement.  The impact of this is that, if the employee does know of something but signs the agreement without raising the possibility of claims/complaints, the employer may be in a position to refuse to pay the settlement money or to get the money back at a later date.

This is because a settlement agreement is really just a special form of contract and, as such, its terms are enforceable by the Courts in the usual way. Consequently, it is important that both parties understand that they are bound by all of the requirements of the agreement and not just the prohibition on proceeding with any Employment Tribunal claims. For example, employers often ask employees to agree not to make any derogatory comments about them but, in return, employers often give commitments to keep matters confidential or to provide references.  If the employer does not keep to these commitments, they could face breach of contract claims from the ex-employee. A breach of contract claim is also the employee’s remedy if the employer fails to pay the amount agreed under the settlement agreement.

Whatever the reason for the agreement, an employee can never be forced to sign it but, the employee is generally enticed into doing so by being offered more than his/her statutory or contractual rights. However, an employer should never assume that an employee will sign a settlement agreement even in a redundancy situation where the employee has applied for voluntary severance.  Employees can and do change their minds.

Until the paperwork is signed by all parties the agreement is not legally binding.  If the employer processes the termination of the employee’s employment before everything is signed off by, for example, preparing the P45 or sending the final salary payment, then the employer could be found to have unfairly dismissed the employee if the employee refuses to sign the agreement. The employer should always ensure the employee and their adviser have signed the agreement before the payments are made and any termination paperwork processed.

Settlement agreements are legally binding documents and proposing, agreeing and signing them can have serious implications for all involved.  It is, therefore, important that all parties seek advice and that they do not assume that, because this is a fairly well known legal tool,  everything will go smoothly.  Both sides need to proceed with caution during the negotiations, right up until the paperwork has been signed by all parties and the independent advisor. 

If you are an employer or an employee looking for advice on settlement agreements, contact Natalie Ruane on 01228 552222 or email nr@burnetts.co.uk.

About the author

Natalie Ruane profile photo

Natalie Ruane

Natalie is a Partner and leads the Employment Law & HR team and specialises in education.

Published: Tuesday 11th October 2016
Categorised: Employment, HR

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