How much do you know about settlement agreements?
Whether you’re an employer who issues settlement agreements regularly or an employee who’s just been offered one for the first time, there’s probably more for you to learn.
In this blog, you’ll discover a few things you may not have known.
1. A settlement agreement is only valid if the employee has had legal advice on it
The purpose of a settlement agreement is for the employee to waive all of their rights to bring a claim. This puts the employee at risk of giving up rights that they may not fully understand.
The requirement for the employee to get legal advice is intended to be a safeguard against an employer unfairly taking advantage of an employee. However, there are other advantages for the employee in getting good legal advice.
There is no corresponding requirement for the employer to get legal advice – the government felt that employers are big enough to look after themselves!
2. There’s no legal requirement for the employee’s solicitor to sign the agreement
Although the legal adviser needs to be identified in the settlement agreement, the law doesn’t actually require the solicitor to sign.
However, most settlement agreements include a requirement that the adviser signs a certificate confirming that the advice has been given. This removes any doubt about whether not the employee has been properly advised.
3. Settlement agreements can be used even when the employee’s employment isn’t coming to an end
Although the usual context of a settlement agreement is the termination of someone’s employment, they can be used in other circumstances.
Some claims, such as discrimination or breach of contract, can be brought even while the employee is still employed. Sometimes, a claim can arise even when there has never been an employment arrangement, for example where a prospective employee alleges that there was discrimination in the recruitment process.
Settlement agreements can be used in any of these situations.
However, there is a trap for the unwary! The tax exemptions that usually apply to compensation paid at the end of someone’s employment doesn’t apply if the employment is still continuing.
4. A settlement agreement isn’t the only way to settle an employment dispute
The law limits the ways that employees can settle employment disputes. However, a settlement agreement isn’t the only way.
An employee can also settle an employment dispute by involving ACAS. When an employee submits to arbitration under the Acas arbitration scheme for unfair dismissal claims, the settlement can be reached with the assistance of an Acas conciliation officer.
5. Settlement agreements used to be called compromise agreements
In July 2013, the government changed the name of compromise agreements to settlement agreements. Their effect was however exactly the same. The reason given is that . . .
“[settlement agreement] more accurately describes their content and will help to avoid any party refusing to sign an agreement on the grounds that they do not want to be seen as ‘compromising’. We also believe that ‘settlement agreement’ is a more widely understood term, being used in the treatment of contract claims.”
Another change that came into force at the same time allowed employers and employees to have pre-contract negotiations.
6. Future claims can be settled in a settlement agreement
Although there has been some debate on the subject, the better view seems to be that it is possible to settle future claims.
The Employment Appeal Tribunal said in the case of Hilton UK Hotels Ltd v McNaughton
“whilst parties may agree that a compromise agreement is to cover future claims of which an employee does not and could not have had knowledge, to do so effectively, the terms of their agreement must be absolutely plain and unequivocal. . . If the parties seek to achieve such an extravagant result that they release claims of which they have and can have no knowledge whether those claims have already come into existence or not, they must do so in language which is absolutely clear and leaves no room for doubt as to what it is they are contracting for. . . .we take the view that it would require extremely clear words for such an intention to be found”.”
It is therefore possible to settle future claims, even if the employee isn’t aware of them. However, the wording would need to be very clear.
7. It’s not just about the money
The amount of money offered in a settlement agreement is often the most important part for most employees. However, there are many other things that can be agreed, including:
- Contribution to legal fees
- Outplacement support (ie help with finding another job)
- An agreement that the employee won’t join a competitor
- A detailed reference
A settlement agreement is a good opportunity to agree these things.
8. The “without prejudice” rule
A settlement agreement will usually be headed “Without Prejudice”.
This means that the employer and employee can discuss proposals freely in negotiations without worrying that what they say may be used in evidence against them. For example, an employer may concede that the employer would have an arguable case for discrimination and is offering compensation on that basis. If the negotiations break down, the employer would not want a tribunal to know that it made that admission.
Communications are deemed to be without prejudice is they are made in a genuine attempt to reach a settlement. It’s not actually necessary to use that exact phrase but it’s good practice to do so. It signals a desire to settle matters amicably.
9. A settlement agreement is usually the entire agreement
Usually, a settlement agreement will include a clause saying that it is the entire agreement between the parties.
This means that if you think you’ve agreed something that’s not included in the settlement agreement, it may not be enforceable. For example, if either party makes a promise verbally or in an email, it won’t be enforceable unless it’s in the settlement agreement.
This may include an employer’s promise
- to pay a bonus
- to provide a detailed reference
- to allow the employee to keep their mobile phone.
Or it may be that the employee has agreed in a separate document not to work for a competitor.
None of these promises are enforceable unless they are included in the settlement agreement.
10. Enforcing a settlement agreement
What happens if either party breaches the settlement agreement?
For example, the employer may not pay the amount agreed with the employee. Or the employee may decide to bring a tribunal claim anyway.
If either party believes that the other party is in breach, they can bring a claim in the civil courts or the employment tribunal. However, they can only bring a claim in the employment tribunal if the settlement agreement was entered into before the end of employment.
Contact Us For Advice on Your Settlement Agreement
If you have received a settlement agreement, you will need to make sure you receive legal advice on it.
We advise clients throughout the UK. Call us now for a free consultation.
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