Published 25th August 2020
What is a Settlement Agreement?
A settlement agreement (also sometimes referred to as a compromise agreement) is a legally binding agreement between an employee and an employer which typically provides a severance payment from the employer in return for an employee’s agreement not to pursue any claims to an Employment Tribunal or Court.
If an employee has a complaint or claim against their employer, they may pursue this at the Employment Tribunal. On this basis, an employer may try and settle this dispute prior to proceedings beginning in order to stop an employee from making a claim or taking an existing claim any further. An employer will usually require that the terms of this agreement are kept confidential regarding details of any severance payment as well as the circumstances surrounding an employee’s employment terminating.
By agreeing to a settlement agreement, an employee waives their rights to bring an employment claim. An agreement is legally binding if a solicitor or legal adviser advises the employee on its contents and signs to confirm this. Specialist employment solicitors also advise on the merits of an employee’s claim and the prospects of success in recovery with the employer, as well as prospects of what would be awarded at an Employment Tribunal should settlement proceedings give rise to a mutual agreement.
Why Do Employers Use Settlement Agreements?
A settlement agreement may involve an employer agreeing to pay-out a sum of money or treating an employee unlawfully or both. Employers will utilise settlement agreements when they wish to terminate an employment contract on terms that are mutually agreed upon with the employee. As such, an amicable exit would be agreed upon and no claims can then arise or be pursued following this.
Where an employer does not want to pursue nor believe it is feasible to pursue what could be a long, drawn-out process, such as a performance review or a full redundancy process, settlement agreements may be utilised. Further, where issues surrounding discrimination or grievances arise, an employer may want to circumvent a claim for constructive dismissal and/or discrimination.
How are Settlement Agreements Legally Binding?
For a Settlement Agreement to be legally binding it must meet the following criteria:
- The agreement must be in writing;
- The agreement must relate to a particular complaint or certain proceedings;
- The employee must have received advice from an independent adviser;
- The independent adviser must have a current contract of insurance or professional indemnity in place, covering the risk of a claim by the employee in respect of loss arising from the advice;
- The agreement must identify the adviser;
- The agreement must state that the applicable statutory conditions regulating the settlement agreement have been met.
An employee should be given a reasonable amount of time to consider the proposed conditions of the agreement; this should usually be a minimum of 10 calendar days unless the parties agree otherwise.
What are the benefits to Settlement Agreements rather than pursuing to an Employment Tribunal?
- A Settlement Agreement provides greater certainty
Although an Employment Tribunal has the potential of awarding greater amounts than what may be received through a settlement agreement, it must be noted a Tribunal also has the potential of awarding an employee nothing, should their claim be unsuccessful. The outcome of any Tribunal is uncertain and will depend on a number of factors. Therefore, by agreeing to a settlement agreement a greater sense of certainty is present and there is not a risk of an employee walking away without anything.
- Employment Tribunal claims can be very stressful
Pursuing a claim onto an Employment Tribunal can often be very stressful as witness statements and evidence must be provided by both parties and creditably may be questioned. However, a settlement agreement can be completed without the stress of a long process and the need to attend a tribunal or provide documentation.
- Employment Tribunals take far longer
The average time for a claim to be concluded in the Employment Tribunal is 27 weeks, but with the virus and other backlogs, we are seeing that they can take significantly longer. In stark comparison, a settlement agreement can be concluded within a mere couple of days.
- Settlement agreements are not made public
When pursuing a claim onto an Employment Tribunal, the claim will be published which means that anyone can uncover and read up on the claim, including potential employers and employees. However, a settlement agreement remains private and confidential between both an employee and employer.
Can an Employer Threaten Dismissal if An Employee Chooses not to Accept the Settlement Agreement?
Should an employer threaten dismissal prior to any form of the disciplinary process and upon a Settlement Agreement being rejected, this would constitute improper behaviour and would be disclosable to a Tribunal as relevant case facts. The employee should raise a grievance in response and if this is not upheld, it may result in an employee resigning and claiming constructive unfair dismissal.
A settlement agreement will deal with notice payments within their terms and conditions. Should an employee hold no contract of employment or should their contract not contain a provision that refers to payment in lieu of notice (PILON) an employer may pay their notice as a gross amount.
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