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WHAT IS A SETTLEMENT AGREEMENT?

By Natasha Smith, Senior Associate

Settlement Agreements are legally binding contracts which can be used to end an employment relationship on agreed terms. Formerly known as compromise agreements, settlement agreements are a written agreement between an employee and their employer under which the employee agrees to settle employment tribunal claim(s) that they have or could potentially have against their employer.

When is it appropriate for an employer to rely on one?

A Settlement Agreement provides protection for employers in relation to a number of workplace scenarios. The general idea is that Settlement Agreements achieve a clean break with the certainty that in return for a payment, the employee will not be able to bringemployment claims.

A Settlement Agreement means claims and disputes are quickly settled in a legally binding document.

There are a wide range of scenarios in which Settlement Agreements might be used by employers. These include situations where they might not want to follow a potentially long process, such as a full performance/capability review or a full restructuring process, before being able to terminate employment. 

It is important to seek employment law advice before making decisions that could bring about a claim against the business. There can be a risk that an employee may claim the offer of a settlement agreement came out of the blue and that concerns had not been raised previously. 

Whilst the employer may want to argue that any discussions, and supporting documents are off the record, the employee may wish to use these as evidence as part of a formal grievance if they feel that the employment relationship has broken down due to the offer of a settlement agreement to end their employment.

What does it usually include?

It is normal to offer a severance payment in return for the employee’s agreement not to pursue any claims in a Tribunal or a Court. How much to offer an employee to settle their potential claim(s) will depend on the specific circumstances surrounding the Settlement Agreement and we recommend that you seek specialist employment advice before doing so. 

As well as the severance payment, it is important to ensure that all contractual entitlements in relation to notice or payment in lieu, accrued but untaken holiday entitlement are taken into account.

Settlement Agreements can also be used to reach a conclusion to a workplace issue which does not result in the end of the employment relationship. For example, resolving a dispute over holiday pay.

The key benefit of using a Settlement Agreement is that the circumstances leading to the employee’s contract being terminated and/or the terms and payment proposed will remain confidential.

There may also be clauses preventing the employee from making derogatory comments against the business or clauses reiterating any contractual post termination restrictions (or introducing them if they don’t already exist). 

What is the process?

Employers should ensure that any correspondence or communications with the employee about settling their potential employment claim(s) are held on a ‘without prejudice’ or off the record basis.

Employers should give the employee a reasonable period of time to consider the proposed Settlement Agreement. What constitutes a reasonable period of time will depend on the circumstances of the case. As a general rule, a minimum period of 10 calendar days should be allowed to consider the proposed formal written terms of a settlement agreement and to receive independent advice, unless the parties agree otherwise.

For any Settlement Agreement to be legally binding, the employee must seek independent legal advice on the proposed settlement terms before it can be signed. As this is a requirement, it is standard for employers to pay a contribution towards the employee’s legal fees for obtaining such advice which are usually in the region of £500 plus VAT. 

Whilst it may initially appear to be a daunting process with upfront costs to be met to secure the exit of an employee on agreed terms, once the Settlement Agreement has been signed, employers will have peace of mind that their employee will not be able to bring any claims in a Tribunal or Court. This is in addition to avoiding the risk of incurring increased legal costs, losing valuable management time and causing potential reputational damage to the business defending any legal claim(s) that are brought. 

If you would like to discuss the potential legal implications for employers who are dealing with post termination restrictions or any other employment matter, please do not hesitate to contact Joseph Oates on email: jmo@cooperburnett.com or Natasha Smith on email: nes@cooperburnett.com or tel: 01892 515022.

This blog is not intended as legal advice that can be relied upon and CooperBurnett LLP does not accept any responsibility for the accuracy of its contents.

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September 30, 2022
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