A settlement agreement (which used to be referred to as a compromise agreement), in an employment law context, is a legally binding agreement between an employee and an employer which usually provides for an employer making a severance payment in return for an employee agreeing both not to pursue any possible legal claims and also to keep the terms and circumstances of their contract’s termination confidential.
Settlement agreements are the only effective way for an employer to influence the statutory rights and remedies available to employees in the event that a problem arises during or after their employment and to restrict an employee’s right to lodge an employment claim. A settlement agreement is entered into voluntarily and can be formed at any stage of an employment relationship.
Mandatory elements of a settlement agreement
Settlement agreements are strictly regulated by statute (The Employment Rights Act 1996) and in order to be effective a settlement agreement must satisfy the relevant regulatory criteria.
The mandatory elements of a settlement agreement are as follows:
- The agreement should be recorded in writing.
- It should cover the particular complaints or proceedings being compromised (an employee cannot agree to waive claims that have not been raised in the agreement).
- The employee should have obtained independent legal advice on the proposed terms and the effect of the agreement on their rights to make a claim against their employer.
- The agreement must indicate that the legal adviser has an insurance contract in place for indemnity purposes (professional indemnity insurance).
- The legal adviser will need to be identified in the agreement.
- The agreement must contain a statement to emphasise that the conditions regulating the validity of the settlement (under the Employment Rights Act 1996) have been met.
Recommended content for a settlement agreement
Depending on what the situation is, the settlement agreement will also need to contain a range of provisions to ensure that the contract is sufficiently clear and comprehensive. Some of the main details to include are as follows:
- A termination date.
- An indication of whether there will be termination on notice or payment in lieu of notice.
- What an employee will be paid for the settlement agreement.
- A declaration that the first £30,000 of any fee due in respect of termination of employment will be tax-free.
- How much the employer will pay (if anything) for legal costs relating to the obligatory independent professional advice.
- A summary of those claims not covered by the agreement, commonly harassment, discrimination, wrongful dismissal, unfair dismissal, breach of contract, unlawful deductions from wages and statutory redundancy payments.
- A statement that the employee does not agree to waive any claims arising from personal injury or pension rights.
- An undertaking to return any company property to the employer upon termination.
- An outline of any duties of confidentiality relating to the contract of employment and to the settlement agreement itself.
- A restriction on the employee’s right to make derogatory statements about the employer or any colleague.
- A clause underlining the restrictive covenants contained in the contract of employment.
- An undertaking to indemnify the employer against any tax which may become payable under the terms of the agreement.
- A warranty given by the employee that no other offer of employment has been made or is expected to be made at the time of the agreement.
- A warranty given by the employee not to pursue proceedings against the employer.
- A severability clause allowing any invalid, unenforceable or illegal terms to be severed from the agreement (without rendering the whole agreement void).
- An entire agreement clause which serves to prevent other terms not contained in the agreement from having any effect.
- If appropriate, an obligation on the employer’s part to provide a reference (the terms of which are frequently agreed and from which the employer is prevented from departing).
A solicitor will also advise on whether the sums offered to an employee in a settlement agreement represent a good enough deal. This will be based on the background facts and whether an employee would have a strong claim were they to take a case to a Court or Tribunal. If your solicitor advises that the terms offered are insufficient you may then instruct the solicitor to negotiate on your behalf to ensure that you obtain an improved and satisfactory offer before signing the settlement agreement.
Finally, if you are an employee or employer looking for assistance with drafting, negotiating and agreeing a settlement agreement in order to best protect and advance your position please do get in touch and we would of course be delighted to help you, working with and through one of our trusted regulated and insured law firm partners.