The purpose of a settlement agreement (formerly known as a “compromise agreement”) is to set out the terms on which an employer and employee have agreed to settle any actual or potential claims which the employee might have against the employer. It is more commonly used upon termination of the employment but can also be used to resolve any disputes during the course of the employment relationship.
The settlement agreement is a contract. In exchange for the payment of sum(s) by the employer and other commitments, such as providing a reference and a commitment not to make derogatory comments, the employee agrees to withdraw and/or not pursue any actual or potential claims.
It is usually specified that the only three claims that an employee can bring after signing a settlement agreement and without penalty are:
- For personal injury claims not arising from discrimination and the symptoms of which the employee is not currently aware of;
- For accrued pension benefits; and
- To enforce the terms of the agreement.
Equally, the employer usually inserts a “claw-back” clause to the effect that if the employee breaches the terms of the settlement agreement or files a claim subsequent to signing, or has breached the employment contract unbeknownst to the employer, that some or all of the money paid will be repayable as a debt. Usually, the employer will claim the right to add costs, expenses, interest and legal fees to that sum. Providing that the money paid be recoverable as a debt means that the employer can proceed straight away to to obtain a default judgment for the amount and you cannot in effect raise any arguments to stop their obtaining such a default judgment.
However, what is the position if, following the signing of a settlement agreement, either party breaches its terms, or discovers that the other party lied during the settlement negotiations, or does something to create a new cause of action?
The position is more straightforward where the employer is the “injured party”. If it transpires that the employee has breached his contract of employment prior to signing the settlement agreement (for example, by stealing money from the employer) or has subsequently been in breach of the non-derogatory provisions of the settlement agreement, or has lied about not having a new job, then the employer usually has a remedy available within the settlement agreement. This would usually provide that settlement funds are withheld if not already paid, or alternatively that the funds are repaid. Recent case law (Cavendish Square Holding BV (Appellant) v Talal El Makdessi (Respondent) and ParkingEye Limited (Respondent) v Beavis (Appellant)) suggests that a well-drafted claw-back clause is likely to be valid and enforceable even if the sum to be repaid is not a genuine pre-estimate of the loss that the employer suffers as a result of the breach.
The position is less clear when the employee is the injured party. Any legal adviser will tell their client that prior to signing the settlement agreement, they need to be sure that they have no actual or potential claims that they are not willing to waive fully. However, that is based on knowledge held by the employee at the time of signing.
Where an employee is induced to enter into a settlement agreement based on a statement by their employer that subsequently turns out to be untrue, then common law remedies of damages or rescission for fraudulent, negligent or innocent misrepresentation would usually be available. However, difficulties are caused by the presence of an “entire agreement” clause in most settlement agreements, whose purpose it is to exclude an employer’s liability for pre-contractual statements that are not recorded in the final settlement agreement. An employee would have to prove that an employer made a fraudulent misrepresentation to induce them to enter into the settlement agreement, fraudulent misrepresentations being incapable of being included within the ambit of the entire agreement clause.
From an employer’s perspective, having a well-drafted entire agreement clause will be key in ensuring that any claims for negligent or innocent misrepresentation will be excluded.
The Equality Act 2010 (s.108) states that discriminating against or harassing a former employee is unlawful. The fact that a settlement agreement has been signed by an employer and former employee should not in theory preclude that employee from filing a claim, if the employer subsequently breaches the Equality Act
In Jessemey v Rowstock Ltd & Anr  EWCA Civ 185, Mr Jessemey brought a claim for post-termination victimisation after he was given a bad reference for bringing previous discrimination proceedings. The Court of Appeal helpfully confirmed that post-termination victimisation is unlawful and Mr Jessemey had a claim.