Settlement agreements

A settlement agreement is a deal between an employer and employee that ends a dispute and/or a contract of employment. It means that an employee agrees not to pursue a legal claim against the employer in return for some kind of benefit. A valid settlement agreement is one that adheres to employment law, can be accepted by an employment tribunal and where an independent, employment lawyer is involved in negotiations.

The settlement agreement, also known as a compromise agreement, is a contract that legally settles a dispute so that an employment tribunal on seeing the agreement would not accept a claim by the employee or employer. The employee cannot lodge a claim at an employment tribunal for unfair dismissal, constructive dismissal, breach of contract or anything else. The settlement agreement should also resolve a specific dispute or complaint between employer and employee. It has to fit the relevant facts so there is no one-size-fits-all deal that can be taken off the shelf.

Benefits of a settlement agreement

The settlement agreement sets out the full terms between the parties. It can be used to avoid costly and time-consuming performance, disciplinary or redundancy procedures. It will mean that the employer will receive payments that could include a tax free sum, redundancy, holiday, bonus, other sums and a job reference. Settlement agreements mean an employer can avoid the publicity, costs or the uncertainty of an employment tribunal. For employees, it means financial and other compensation for losing a job but without any necessity to take legal action at an employment tribunal.

Conditions of a settlement agreement

A number of conditions need to be met for a settlement agreement to be legally binding. These conditions are that the: 

– agreement must be in writing,

– agreement must relate to a particular dispute or complaint 

– employee must have received independent, employment law advice, or advice from a certified and authorised member of a trade union

– independent adviser must have insurance or professional indemnity to cover any claim against the advice given 

– agreement must identify the adviser

– agreement must state that the employment law and other applicable statutory conditions regulating the settlement agreement have been met.

Prejudicing settlement agreements

If a deal cannot be made, any discussions that takes place to bring about the settlement agreement cannot be used in evidence if the employee or employer then goes to court. Documents, letters and emails connected to these discussions will be labelled ‘without prejudice’. This means that the content cannot prejudice or affect any proceedings in a court of law. This allows for frank discussion to take place between employer and employee in order to produce a settlement agreement. 

Documents related to the drawing up a settlement agreement may contain the words ‘Subject to contract’. This means that the agreement is not be legally binding unless and until there is agreement on the final wording and there is an agreed signed contract. This stops either party saying that there has been binding agreement before the settlement agreement.

Unfair dismissal

In the last few years, ‘protected conversations’ were introduced so that an employer and employee can start discussions about settlement discussions without there being a dispute. But this settlement agreement is not the same as the typical agreement. Protected conversations only relate to typical unfair dismissal claims. They cannot be used to address dismissals that are automatically unfair, such as those involving health and safety, discrimination or whistleblowing.

An employer cannot expect conversations will be protected if he or she engages in ‘inappropriate conduct’ as part of the drawing up the agreement. The employer cannot tell the employee to accept the agreement or else they will need to resign or be dismissed. If so, an employee can go to an employment tribunal and claim constructive dismissal.

Larger employers such as banks, may offer settlement agreements on a routine basis when there is no dispute. In such cases, it does not mean that the employer fears legal action in an employment tribunal. Instead, the employer could use the settlement agreement to prevent an employee from raising issues after the end of the employment contract.

Code on settlement agreements

The Advisory, Conciliation and Arbitration Service have produced a Code of Practice on Settlement Agreements. This sets out how settlement agreements should operate and also provides best practice on how negotiations should take place. The Code is not legally binding but is recognised by employment tribunals and employers will need to explain to a tribunal why they did not follow it.