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Employment Settlement Agreement in the UK – All you Should Know

Posted by Davenport Solicitors Team on July 29, 2021 in Settlement Agreements

If you have received a settlement agreement or you are considering proposing one, read this before you move forward.

What is a Settlement Agreement?

A Settlement Agreement (formerly known as a Compromise Agreement) is a legally binding agreement between you and your employer. This usually provides for a severance payment by the employer in return for your agreement not to pursue any claims in a Tribunal or a Court.

The employer will usually require you to keep the terms, for example, the amount and the surrounding circumstances of your contract’s termination, confidential.

When are Settlement Agreements Appropriate?

A situation in which you might consider using a settlement agreement could be, for example, where an employee is not performing well, and neither party wants to go through a long capability process, and both employer and employee are willing to bring the employment to a quick end on agreed financial terms.

A settlement agreement is usually used in connection with ending the employment, but it doesn’t have to be. A settlement agreement could also be used where the employment is ongoing, but both parties want to settle a dispute that has arisen between them.

Typically, a settlement agreement’s purpose is to confirm termination of someone’s employment and ensure that the employee will not bring legal claims against the employer in return for compensation, usually financial.

As settlement agreements are legally binding, voluntary and subject to negotiation, it is important to receive settlement agreement advice from a specialist solicitor before presenting a settlement agreement to an employee or, as an employee, agreeing to the terms of one.

In most instances, a settlement agreement is drawn up to achieve an amicable and fair separation between employer and employee, i.e., to draw a line under a period of employment. Usually, this is instigated in response to concerns over employee performance or conduct.

Nevertheless, there are other types of settlement agreement scenarios:

1. Redundancy

If you are being made redundant, your employer may offer you a redundancy settlement agreement. The redundancy process can be complex, time-consuming, and costly. Therefore, it is common for companies to offer a redundancy settlement agreement to reduce the risk of future Employment Tribunal claims, to minimise the consultation process, and unsettling other employees. Click the link for further information on redundancy and restructuring.

2. To avoid an Employment Tribunal

If you bring an unfair dismissal claim or mistreatment claim against your former employer, they may offer you a settlement agreement to stop the claim from being brought to the Employment Tribunal to avoid the subsequent costs, management time, and negative publicity.

3. Ill-health

If you have a long-term health issue impacting your work, your employer may offer you an ex-gratia (goodwill) payment in return for your resignation. They may ask you to sign an employment settlement agreement to avoid disability claims being brought against them in the future.

4. Non-financial payments

A settlement agreement may be used by an employee to secure non-financial payments in their employment package, such as a company car or private health insurance.

5. Grievance

If you have raised a valid grievance with your employer, they may offer you an employment settlement agreement in order to keep the grievance confidential. Find out more about raising grievances here.

For more information on settlement agreements for employers, click here.

For more information on settlement agreements for employees, click here.

What Claims Cannot be Settled by a Settlement Agreement?

While settlement agreements can be used to settle a number of claims, there are some that they cannot cover.

Claims that cannot be waived include:

  • Some collective consultation failures (where there is a TUPE transfer or collective redundancy)
  • Some claims under the Agency Workers Regulation 2010 (although these can be settled through a COT3 agreement)
  • Claims under the Trade Union blacklists regulations,
  • Claims for statutory maternity, paternity, or adoption pay.

Many of these claims ultimately result in an employment tribunal.

What Should be Included in a Settlement Agreement?

The Settlement Agreement must:

  • Be in writing
  • State specifically what claims are excluded from being made once it’s signed
  • Be signed by the employee
  • Must confirm that you’ve had independent legal advice from the legal advisor identified in the agreement
  • State that all legal requirements have been satisfied
  • Relate to particular complaints or particular proceedings (this means specifying the particular claims that are being waived; it is not good practice to simply list every claim, and the agreement would be of no use if it simply referred to “all employment claims”)
  • The employee must have received legal advice about the terms and effect of the settlement agreement from a ‘relevant independent adviser’ (qualified lawyers, certified Trade Union or voluntary sector officers, or other advisers specified in legislation)
  • The agreement must identify the adviser, and the adviser must have insurance cover for faulty advice
  • The agreement must state that the conditions set out above have been met.
    The agreement must relate to the contract of employment.

How do I offer a Settlement Agreement?

As an employer, you can offer a settlement agreement for many reasons. Although, usually, it is because something has gone wrong at work. An employee may disagree with the way someone at work treats them. Or they may have been harassed and discriminated against. Additionally, they may have been dismissed or managed out of their job.

A Settlement Agreement would also be used where there is a dispute between an employer and employee – as a means of bringing that dispute to a close. In other words, it becomes the document that sets out the final terms that have been negotiated against the threat of legal claim against an employer.

Of course, employees are under no obligation to accept a Settlement Agreement and should and can only do so once independent legal advice has been obtained.

How to Respond to a Settlement Agreement?

Once an employee has been made an offer by their employer, they need to respond, and they need to do that in writing.

If you would like Davenport Solicitors to support you with further advice on Settlement Agreements or to speak to our specialist Employment Law Solicitors, we welcome you to visit our contact us page or email us at contact@davenportsolicitors.com or give our expert lawyers a call on 02079 036888.

The material contained on this website contains general information only and does not constitute legal or other professional advice and should not be relied upon as such. While every care has been taken in the preparation of the information on this site, readers are advised to seek specific legal advice in relation to any decision or course of action.


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