Settlement Agreements: A Short Guide

Settlement agreements outline the terms and conditions agreed by an employee and their employer when they decide to settle all actual and potential employment tribunal claims in exchange for a sum of money.

Typically, a settlement agreement will draw a line under existing or potential employment law issues, allowing both parties to break off the relationship without the threat of future legal disputes.

Some key features of settlement agreements include:

  • They're legally binding;
  • Employees will receive some form of financial payment AND, usually, a reference;
  • They're completely voluntary;
  • Discussion and negotiation is normal.

However, they're not exclusively for use when a working relationship ends, as a dispute over holiday pay, for example, can also be resolved through a settlement agreement.

Importantly, the settlement agreement is only binding once independent legal advice has been sought from a solicitor or another suitably qualified party and a certificate issued confirming advice has been given.

Offering a Settlement Agreement

It's important to note that a settlement agreement can be offered at any stage of an employment relationship, although employers should think long and hard about when and how to make an offer.

Why? Because not every workplace dispute warrants a settlement agreement, and they're not a viable substitute for good management practices.

Some of the circumstances in which a settlement agreement can be used include:

  • Redundancy.
  • Long-term sickness.
  • Personality clash.
  • Settling a grievance.

In most cases, though, the employee and employer can make moves to settle their differences amicably, resolving difficulties without the need for further action.

As such, the ACAS guide to managing employee performance should be a go-to resource for employers seeking formal and informal procedures for resolving workplace disputes.

The Benefits of a Settlement Agreement

Horns locking in the workplace can be a harrowing experience for both parties – but a settlement agreement can put paid to bad blood.

Not only will it help provide a sharp and dignified end to a splintered relationship, it can alleviate stress, time and cost for both parties involved.

However, it's important to note there is the risk of a fractured relationship continuing if the terms laid out in the settlement are not agreed.

Making a Settlement Offer

For employers, settlement offers can be made orally or in writing, following the "without prejudice" principle which prevents statements being put before an employment tribunal.

For a settlement discussion or agreement to be protected under the "without prejudice" principle, there should be an "existing dispute" between parties AND a legitimate effort to settle it.

If there is no dispute, the employer can have a "protected conversation" with the employee, which has the same effect as a "without prejudice" discussion.

However, protected conversations only relate to matters involving unfair dismissal, they do not apply to other kind of disputes, such as discrimination.

Additionally, there must be no "unambiguous impropriety" in the conduct of both parties throughout the settlement discussions.

Indeed, simply chatting with the employee involved can often be a useful first step on the road to settlement, with a written offer helpful in avoiding potential misinterpretation.

Typically, a written offer will set out the proposed terms, with details of how much compensation the employee can expect.

The final agreement must also be put in writing.

Whether an offer is made orally or in writing, however, it's a good idea to make it clear to the employee exactly why the offer is being made.

Crucially, if you don't have a template settlement agreement in place, talk to us and we can draft one for you, which ensures your position as an employer is protected.

Receiving a Settlement Offer

For employees, it's important to note that your employer can make a verbal offer of settlement at any time.

Provided it has been indicated to you from the outset (as set out above), in most cases the contents of any discussion between you and your employer will be classed as confidential.

This means you cannot refer to what your employer said at a subsequent tribunal.

You don't have to accept your employer's offer, with options available to reject it or to request that a comprehensive performance process is followed.

Importantly, the ACAS Code of Practice sets out how settlement agreements should work, with examples of "improper behaviour" from your employer also outlined.

Improper behaviour can include:

  • Putting pressure on you to accept an offer.
  • Bullying and harassment.
  • Physical assault or threats.

Perhaps most crucially, you should take time to consider the offer – and seek appropriate legal advice – and not commit yourself to one particular course of action too soon.

The Terms of a Settlement Agreement

While it's important to seek expert legal advice before finalising a settlement agreement, there are various terms you must understand, with some of the main conditions outlined below.

Typically, a settlement agreement will include various terms that you agree not to pursue a claim under, including the Employment Rights Act 1996 and the Equality Act 2010.

Importantly, if it's been agreed that you won't be working your full notice period, the settlement agreement should also detail this.

In addition, the first £30,000 of any compensation payment you receive is normally tax-free and not subject to NI deductions, although the settlement agreement will need to be carefully worded for the payment to come within the £30,000 exemption.

It's also wise to have a "non-derogatory" clause included in the agreement, which means your employer cannot make disparaging statements about you to a third party.

You should also have an agreed job reference attached to the settlement agreement, which means future employers cannot be dissuaded by a less than favourable review from your former company.

Admittedly, there is a raft of information to consider when it comes to settlement agreements, which is why, whether you're an employer or employee, you need the specialists on your side.

For more information about how we can help you protect your interests, get in touch with a member of our team today for your free consultation – we'd be happy to help.