Settlement Agreements
What is a settlement agreement?
A settlement agreement is a legally binding contract made between an employer and employee. Employers usually offer settlement agreements when they are terminating someone’s employment, or if there is an ongoing dispute that they want to resolve. They used to be known as compromise agreements.
How does a settlement agreement work
A settlement agreement sets out the terms and conditions agreed between the parties involved.
For a settlement agreement to be legally binding in England and Wales, the following five conditions from Section 203 of the Employment Rights Act 1996 must be met: –
- The agreement must be in writing.
- The agreement must relate to a specific complaint or proceedings.
- An independent legal adviser must have informed the employee of the terms and effect of the proposed agreement, and the impact it would have on their ability to pursue that complaint or proceeding before an employment tribunal.
- The agreement must identify the adviser and their advice must be covered by insurance.
- The agreement must state that the conditions regulating settlement agreement under the Employment Rights Act have been satisfied.
What should be in a settlement agreement
Settlement agreements typically include termination payments – such as your notice pay, a tax-free sum, redundancy, holiday, bonus, shares, and other benefits.
However, as a condition of receiving these payments, you must agree not to pursue certain statutory claims against your employer in a Tribunal or Court, including unfair dismissal, discrimination, or breach of contract.
There will also likely be a confidentiality clause which covers both the employer and employee
All of this should be agreed by both parties. During the process of negotiating a settlement agreement, the Acas Code of Practice states that employees should be given a minimum of 10 calendar days, unless agreed otherwise, to consider a settlement offer. Although the code is not binding, employers would have to justify why they don’t need to follow it
Why do employers use settlement agreements
Employers will offer a settlement agreement when they want to terminate an employment contract on mutually agreed terms. This is done to provide a clean break with no opportunity for you to take them to court or an employment tribunal for more money.
Employers will often use them to avoid a long, drawn-out process, such as a full redundancy procedure or a performance review before being able to terminate an employee’s contract
Another situation that could prompt a settlement agreement is if you’re having issues around discrimination or have raised a grievance. In these cases, your employer may use it to avoid a claim for constructive dismissal and/or discrimination.
Do I have to sign a settlement agreement
No. An employee cannot be forced by their employer to sign a settlement agreement.
Is a settlement agreement legally binding
Yes. A settlement agreement is a legally binding contract once signed by all parties. It is one of a limited number of ways that such an agreement between an employer and employee can be totally legally binding in law.
Should I get legal advice before I sign
Yes. An agreement where you waive your rights to bring an employment claim can only be recognised in law if a solicitor or a certified trade union representative has provided you with independent legal advice about the terms of the agreement. Obtaining legal advice can help you decide if a signing the agreement is the right choice for you and can also help you negotiate the best possible deal.
How much will it cost
Most employers will agree to pay a contribution or all the fees for the legal advice you receive in relation to a review of your settlement agreement. This can range from £250 to £500 plus VAT.
The contribution can be more than this, but it is very rarely less. Any contributions towards legal fees are not a right or entitlement under the law, but employers almost always offer them.
Can I still get an employment reference if I sign?
While it is common for a settlement agreement to include a provision which states that your employer will provide a reference for you, there is no legal requirement to do so. You must ensure one is included. We can negotiate this for you.
You will also want to make sure that the specific wording of any future reference is set out and that your employer agrees not to use any other words.
Your ability to get a job after a settlement agreement may be impacted in certain situations. The agreement may contain restrictions which prevent you from working for another company or in a particular field for a certain amount of time.