What are they?
A settlement agreement is a legally binding contract between an employer and an employee that settles claims the employee may have against their employer.
When are they used?
Normally they arise at the end of an employment relationship but they can also be used at any point to settle a dispute or disagreement between the parties.
Examples of their use include agreeing financial terms to end an employment quickly or when the employer wants to end an underperforming employee’s contract, with both parties agreeing to avoid a lengthy capability and performance process.
What are the legal requirements?
The terms of a settlement agreement need to be carefully considered and mutually agreed between employers and employees. Each agreement should be tailored to the employee’s specific circumstances, identifying which claims the employee is waiving the right to pursue in return for the settlement payment.
Legally, a settlement agreement is only valid when certain conditions are met. These are:
- The agreement must be in writing and relate to a “particular complaint/proceedings” that are being settled.
- Before entering into it, the employee must receive independent legal advice on the terms and effect of the proposed agreement and hi/her ability to pursue any rights before an employment tribunal.
- The adviser (such as a solicitor or a certified trade union official) must be clearly identified in the written agreement and their advice must be covered by insurance.
- The agreement must state that the conditions regulating settlement agreements under the relevant statutory provisions have been satisfied.
Some statutory claims cannot be compromised under a settlement agreement, such as claims relating to TUPE transfers (claims for failure to inform and consult affected employees; failure to pay the compensation that is equivalent to the protective award; and claims for failure to provide employee liability information under TUPE 2006). These can be settled through ACAS, as the conciliation officers can settle claims that are, or could be, the subject of tribunal proceedings.
In practice, employers normally pay the employee’s legal fees for obtaining independent legal advice.
Settlement agreements are a useful way to avoid employment disputes escalating into legal claims. They may however, not suit every situation. If the settlement agreement does not meet all the statutory requirements, it will not be a valid settlement and the employee could still bring a claim, so it is important to obtain professional advice before you decide to propose or enter into one.