What is a Settlement Agreement?
Settlements agreements were previously, and remain, commonly known as compromise agreements. A settlement agreement is often used by employers when they want to terminate a contract of employment on terms that are mutually agreed with the employee. This may be because there is a dispute between employer and employee, because there is a genuine reason (such as redundancy) but the employer wishes to avoid the lengthy procedures needed, or simply because one or both parties wish to extract themselves from the contractual obligations.
Our latest post takes a look at settlement agreements in further detail, including information on how they may help in redundancy situations and what makes them legally binding.
Settlement Agreements in a Redundancy Situation
In a redundancy situation a settlement agreement can reduce the time it would take to go through the standard formal redundancy procedures. The advantage for employers, therefore, is that they avoid time-consuming procedures which can also be unsettling for all staff and, if they fail in any respect to follow a fair procedure, the employees may claim the breach of procedure renders the redundancy dismissal unfair, and the employer may then be subject to expensive and time-consuming claims.
The advantage for employees is that they will usually be offered enhanced terms, ie they will receive more monies or benefits than they would under the standard statutory redundancy scheme. In return, they agree to waive any legal claims that they might have.
The Effect of Settlement Agreements
In general, the effect is that an employee waives their right to bring forward most employment claims, usually including unfair dismissal, discrimination and entitlement to statutory redundancy pay. Consequently, this type of agreement can provide an employer with the peace of mind that they will not have to spend time and money defending themselves against an employment claim in the future.
Further to this, a settlement agreement may include a “non-derogatory” statements clause preventing the employee from making negative remarks about the employer, including on social media. The agreement may also state that the terms of the agreement and circumstances leading to the agreement are kept confidential.
What Happens if the Terms of a Settlement Agreement Are Breached?
A settlement agreement is a legally binding document. Consequently, if an employee seeks to break their agreement not to issue claims, the settlement agreement can be put forward as a defence to the claims. Furthermore, if the terms of the agreement are breached, the affected party can bring a claim to court or tribunal. Typically, a claim for damages will be sought for any loss incurred as a result of the breach.
If there is an enforceable repayment clause in the settlement agreement, the employee may be required to pay back all or some of the money they have been paid by the employer, along with any legal fees the employer has incurred as a result of the breach.
Is a Settlement Agreement Different From Redundancy?
The short answer is yes. Whilst a settlement agreement may be used in place of the usual redundancy procedure, the two are separate and distinct
A standard redundancy procedure must follow certain processes that are defined in law or by codes of practice or even by contract. Redundancy will typically occur when an employer has a reduced requirement for employees of a particular kind at the place where the employee is employed.
Does an Employee Have to Accept the Agreement?
An employee does not have to accept a settlement agreement or even enter into a conversation about it if they do not want to.
If the terms of a settlement agreement are not agreed upon by the employee, they may make a counter-proposal. Negotiations of the terms in the agreement can be made between the employer and employee until both agree, or decide that an agreement cannot be reached.
When a settlement agreement is offered, it is now usual to make the offer as part of a Protected Conversation under section 111A of the Employment Rights Act. This procedure, if followed correctly, means that if terms are not agreed, the employee may not refer to the offer of settlement if he or she later pursues a claim of unfair dismissal. An employee must be given a “reasonable” amount of time to consider the agreement under section 111A. In reference to settlement agreements, the Acas Code of Practice states a “minimum of 10 calendar days unless the parties agree otherwise” is reasonable.
What Makes a Settlement Agreement Legally Binding?
The nature of a settlement agreement means that an employee waives their right to bring certain employment claims. Consequently, the agreement can only be legally binding if it has been signed by a solicitor or certified trade union advisor.
There are also other stipulations that ensure the agreement is legally binding:
● The agreement must be in writing
● The employee must have sought legal advice from an appropriate independent advisor and the advisor must be identified in the agreement
● The advisor must have a contract of insurance or professional indemnity that protects them from a claim from the employee they advised for any loss incurred as a result of the advice provided
● The agreement must state that all necessary legal conditions have been met
When Will An Employee Receive Their Compensation?
This is a matter of agreement. However, once a settlement agreement has been signed by all parties, any compensation is typically paid to the employee within 7-21 days.
If there is any outstanding salary or accrued outstanding holiday or remuneration for notice to pay, this will usually be paid on the usual payroll date by the usual method.
Butcher & Barlow LLP – Settlement Agreements
The dedicated team at Butcher & Barlow LLP can provide advice and expertise to employers and employees regarding settlement agreements