What you need to know about settlement agreements

What is a settlement agreement?
Settlement agreements (sometimes known as severance agreements, compromise agreements or termination agreements) are a form of agreement that an employer may offer an employee because of a dispute, dismissal or a redundancy process.

A settlement agreement could be a simpler and less stressful way to settle a dispute compared to having to make or defend a claim that must go through the courts or an employment tribunal.

It is also advisable to issue a settlement agreement where an enhanced redundancy payment is being made or where a sum in excess of any legal requirement is being made to you by your employer.

They can also serve as a means of settling other types of employment claims (e.g. claims of discrimination or harassment, such as your employer advertising your job), whether the employment relationship has ended or not.

When you enter into a settlement agreement it involves you signing an agreement promising that you will not bring any claim against your employer. However, not all claims can be settled by way of settlement agreements (for example, failure to inform and consult in a collective redundancy situation).

Generally, a settlement agreement is the only way you as an employee can waive your rights to pursue an employment claim. However, an exception to this is when a settlement is reached following ACAS conciliation.

Advantages of settlement agreements
Settlement agreements can be attractive to employers as they could lower the risk of repercussions, such as employment tribunals.

If you are an employee in this situation, it could also mean that you receive more in compensation than you are legally entitled to.

“Settlement agreements can be attractive to employers as they could lower the risk of repercussions, such as employment tribunals.”

Settlement agreements can be considered tantamount to the employer ‘paying off’ you as an employee, to ensure no claims are issued against them and a line is drawn in the sand. They can also be a very amicable way to resolve tricky situations for both parties.

Another point in favour of settlement agreements is the ease and quickness with which they can be arranged, reducing the tumult for both sides and negating the need for legal action.

Examples of terms that a settlement agreement may contain include:

• An amount of compensation offered to the employee;
• Assurances given by both the employer and employee;
• Confidentiality about the fact of details of the agreement;
• The parties refrain from making disparaging and/or derogatory remarks about the other whether in writing or orally;
• Indication that all terms have been accepted by the employee and that they will not take legal action in future;
• A letter of reference which can be used by the employee in future job applications;
• An agreed announcement;
• A ‘non-compete’ clause which places some restriction on the type of jobs the employee can apply for in the future and an extension of the contract of employment;
• Payment of tax on the compensation.

The role of solicitors and other advisers
When a settlement agreement is drawn up, one condition is that you must receive must advice from an independent adviser otherwise the agreement is not legally binding and does not settle statutory claims. This adviser should be a qualified lawyer (such as a solicitor or barrister), a certified trade union or advice centre representative, or a person of such description as specified by order.

It is normal practice for the adviser to sign a certificate or letter to confirm that they have provided you with advice on the terms and effect of the agreement upon you, as well as the effect of the agreement on your ability to pursue a claim before the employment tribunal. This certificate will also confirm that the adviser has the necessary insurance in place in respect of the advice given.

“You absolutely have the right to reject any offer of settlement, either on principle or because you feel the compensation offered is insufficient.”

Ordinarily the adviser will provide advice on the amount of compensation that should be expected and the effect of the terms on the right to bring legal claims. The settlement agreement cannot be enforced unless you have received the required advice from an independent adviser.

Settlement agreements are increasingly being used to settle employment claims.

Whilst not a legal requirement, is expected practice for an employer to provide a reasonable contribution to the cost of your legal fees. What is deemed reasonable is dependent on your seniority and the nature of the business. The contribution typically ranges from £350.00-£750.00 plus VAT.

Rejecting the settlement agreement
You absolutely have the right to reject any offer of settlement, either on principle or because you feel the compensation offered is insufficient. In the case of inadequate financial remuneration, you can negotiate another settlement or pursue a claim to an employment tribunal/court.

The amount of compensation is purely down to the negotiation between the two parties and ARAG Law can assist with negotiation of the settlement sum and the terms.

Time Limits
Regardless of any discussion around a settlement agreement, what you must bear in mind is that you only have three months less one day from your dismissal, date of resignation, date of discrimination to commence ACAS Early Conciliation, which is a step you need to take before you can issue a claim at the employment tribunal. You then have one month from the date of your ACAS EC certificate to issue your claim at the employment tribunal.

Disclaimer: This information is for general guidance regarding rights and responsibilities and is not formal legal advice as no lawyer-client relationship has been created. Note that the information was accurate at the time of publication, but laws may have since changed.