Section 1. What is a settlement agreement?
A settlement agreement - which was previously known as a compromise agreement - is a legally binding agreement between an employer and employee. It is used to set out the terms and conditions reached when a dispute is to be resolved. Use of a settlement agreement is not restricted to situations where the employee's contract comes to an end, but can also record the terms of an agreement when the employment relationship continues.
When the relationship is ending it may typically include a provision that the employer will make payment of salary, including any accrued but untaken holidays up to the date of termination; and may include payment of compensation for loss of employment.
The main purpose of a settlement agreement is to draw a line under the employment relationship or dispute and, except in certain circumstances, prevent any further compensation claims being made against the employer by the employee in an Employment Tribunal or Court.
Settlement agreements can be proposed by both employers and employees although they will normally be proposed by the employer.
Used appropriately, a settlement agreement provides, for the employee and employer, certainty of outcome; and can also represent value for money, as the cost of a settlement can be less than running an Employment Tribunal case.
A settlement agreement may also be used to deal with a range of other claims which an employee may have, such as:
- Breach of contract
- Unfair dismissal
The issues that settlement agreements seek to resolve can be complex and may involve other members of staff or employees in other organisations. While settlement agreements are intended to give employees and employers a high level of protection in relation to future claims being made, no clause within a settlement agreement can override the legal rights of employees who agree to settle a claim, including a whistleblowing claim, to whistleblow in the future, as set out in the Public Interest Disclosure Act (PIDA) 1998 (see Section 4).
Likewise, the legal rights outlined above extend to employees who agree any form of negotiated settlement containing a confidentiality clause and/or derogatory statement clause.
It is essential that both the employee and the employer seek legal advice before agreeing a settlement agreement, as there are a number of statutory requirements that must be met for a settlement agreement to be legally binding. These are outlined below:
- The agreement must be in writing.
- The employee must have received independent legal advice from an independent advisor on the effect of the agreement. The independent advisor will often be a qualified lawyer but may, for example, be a trade union official, or an employee of an advice centre who is certified as competent to give this type of advice and is authorised to do so.
- The advice obtained by the employee prior to signing any agreement must be genuinely independent - this is the employee's opportunity to obtain their own advice about any aspect of the proposed agreement that they are unclear about, or are not comfortable with.
- The independent advisor must be identified in the agreement and have a current contract of insurance, or professional indemnity insurance, covering the risk of a claim being made against them by the employee in respect of the advice they give.
- The agreement must relate to a particular complaint, or particular proceeding. Employers will need to seek advice on all potential claims an employee may have to ensure potential employment claims are not left uncompromised.
- The agreement must state that the conditions regulating settlement agreements, as outlined above, have been satisfied.
It is important to note that a settlement agreement is a voluntary agreement. Individuals do not have to enter into any discussion about them, or accept the terms proposed in them.
The ACAS Code of Practice provides further information on settlement agreements and this can be accessed at: http://www.acas.org.uk/index.aspx?articleid=4395
Email: Anna Gilbert
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