In employment law, a settlement agreement (formerly known as a compromise agreement) is a legally binding contract used to terminate employment on agreed terms, as a result of which the employee agrees not to pursue legal action in a tribunal or court against the employer in return for a severance payment. Typically, the employee will also have to keep the terms of the agreement confidential.
What employers should consider when drafting a settlement agreement
The rules regarding settlement agreements are contained in the Employment Rights Act 1996, especially sections 111A and 203.
There are several ways in which employers and employees can reach an agreement (either before or after a tribunal hearing has commenced) with the focus being on the negotiating an agreement before terminating employment. This can be achieved via several routes:
- Direct negotiation between employee and employer (the employee will need to retain the services of a solicitor to ensure that the agreement is legally binding).
- An ACAS (Advisory, Conciliation and Arbitration Service) conciliated agreement. ACAS is an independent public body that has developed a code of practice on settlement agreements
- Through a private mediator.
- Judicial mediation by an employment judge where tribunal proceedings have been issued.
Settlement agreements can be complicated affairs and it’s important to understand the rules, so it’s crucial that employers get specialised legal advice before beginning the process. When negotiating, all communications should be treated as ‘without prejudice’ and ‘subject to contract’, meaning both parties can speak freely and anything said can’t be used against them in evidence should negotiations break down.
Understanding the conditions that must be met when creating a settlement agreement
For a valid waiver of statutory employment rights, certain conditions must be met under law:
- The agreement must be in writing and signed by the employee.
- The agreement must relate to a particular complaint or proceedings.
- The employee must receive independent legal advice.
- The adviser must be identified in the agreement and have insurance.
- The agreement must state that the legislative conditions regulating settlement agreements have been met.
- A reasonable timescale should be put in place for both parties to consider the agreement (at least 10 days).
What is a reasonable settlement agreement?
The settlement agreement is a contract between two parties (usually an employer and employee), which settles the employee’s claim against the employer. The employee signs away their right to bring a claim in return for payment. A settlement agreement can contain several types of payments, including:
- Outstanding entitlement to notice.
- Accrued holiday pay.
- Compensation or “ex gratia” payment.
- Bonus, share or incentive scheme payments.
There may also be some non-financial benefits such as the right to keep a company laptop or phone. The final settlement scheme payment will depend on the outcome of the negotiation, so the employee’s solicitor will often ask for more than what the employer is offering. The agreement may come with other clauses including warranties and indemnities, confidentiality agreement and a details regarding employment references. The confidentiality clause (or NDA), in particular, can be difficult to draft and needs specialised legal advice. It’s important you have a confidentiality clause that protects your company’s reputation and protects against any future challenges to its legitimacy.
Other considerations
Employers will also normally contribute towards legal costs. Keeping this low will mean getting the right advice from the outset from a professional firm of settlement agreement solicitors, such as the employment law team at JPP Law.
A settlement agreement is there to benefit all parties. While the employee receives compensation for losing their job, typically more than what would be achieved in an Employment Tribunal claim, the employer can be assured that details of the termination of employment will be kept confidential and avoid any further claims in future.
Doing that in the best possible way for your business means getting the professional help. In the first instance, contact JPP Law for a free 15-minute consultation call with one of our experienced employment law solicitors.
