Settlement agreements serve as a means for employers and employees to conclude their working relationship on mutually agreed terms.
To ensure the legal validity and effectiveness of these agreements, specific criteria must be met, and practical considerations come into play during negotiations.
Understanding Settlement Agreements:
A settlement agreement, also known as a compromise agreement, is a tool used to resolve or prevent legal disputes within the workplace. These agreements typically outline the conditions for ending an employment contract, offering a severance payment to the employee in return for specific obligations. These obligations often include waiving the right to pursue future claims against the employer and maintaining confidentiality.
Settlement Agreements and Contracting-Out Provisions:
Many employment-related claims can be based on statutory provisions. These provisions include clauses, often referred to as “contracting-out provisions,” which prevent parties from reaching an agreement that attempts to resolve or remove the authority of employment tribunals to decide disputes. These clauses can be found in various employment laws. Their purpose is to safeguard the rights of claimants and potential claimants by ensuring they do not waive their right to bring a claim without proper protections.
There are exceptions to these contracting-out rules:
- Agreements reached with support from an ACAS officer following ACAS Early Conciliation.
- Agreements that comply with statutory requirements for a legally binding settlement agreement.
- Claims Excluded from Settlement Agreements:
- Some types of claims cannot be resolved through settlement agreements. These include certain claims related to TUPE, the Agency Workers’ Regulations, and collective redundancy consultation under TULR(C)A 1992.
- Additionally, employees cannot waive their right to statutory entitlements and payments like statutory sick pay, maternity pay, and others.
Why Settlement Agreements Are Used:
Settlement agreements are valuable in cases where no formal legal action has been initiated, and there is no ongoing dispute between the parties. They help in swiftly and amicably resolving employment issues without the need for external intervention, saving time and costs. These agreements are legally binding, just like any other contract.
When Settlement Agreements Are Employed:
Parties involved in an employment-related dispute often seek to avoid the expenses, uncertainties, and time associated with employment tribunal claims or hearings. Settlement agreements can be negotiated when a disagreement arises, before or during the tribunal process. Common situations include redundancy, disciplinary actions, executive severance, and various workplace disputes.
How to Make Settlement Agreements Legally Enforceable:
Settlement agreements must meet specific statutory requirements to be legally binding. These requirements include the agreement being in writing, relating to specific proceedings, requiring the employee to seek independent legal advice, identifying the legal adviser, and stating compliance with relevant statutory provisions.
What Should a Settlement Agreement Include:
Settlement agreements should clearly outline the obligations of both parties, taking into account the nature of the dispute or claim. They typically cover termination dates, severance payments, notice periods, holiday pay, professional references, and confidentiality clauses. Employees often agree to keep the agreement terms confidential, refrain from speaking negatively about the company, and waive certain claims.
Independent Legal Advice:
To waive employment rights and claims, the employee must receive legal advice from an independent adviser, such as a solicitor, before signing the agreement. Employers may contribute to the employee’s legal fees.
Settlement Agreement Tax Considerations:
The tax implications of a settlement amount depend on its size. Compensation for loss of employment can be tax-free up to £30,000, provided it’s compensatory and not contractual. However, factors like notice payments and pension impacts need to be considered to create a tax-efficient arrangement.
Negotiating a Settlement Agreement:
Effective negotiations involve understanding the other party’s true position, managing expectations, and promoting the client’s interests. Negotiators may use without prejudice or protected conversation rules to protect confidentiality during discussions.
Breaching a Settlement Agreement:
The agreement should specify the consequences of breaching its terms. Breach can lead to a claim for breach of contract, potentially requiring repayment of employer payments and legal fees.
Employee’s Voluntary Choice to Sign:
Employees are not legally obligated to sign settlement agreements, and employers cannot force or coerce them into doing so. Independent legal advice is required before signing.
Determining a Fair Settlement:
The fairness of a settlement depends on several factors, including contract terms, the validity of claims, reasons for termination, employee conduct, and the goals of both parties. Factors like notice payments, holiday pay, bonuses, and insurance should be considered.
Conduct of Pre-Termination Negotiations:
The Acas Code of Practice on Settlement Agreements provides guidance on the correct approach to negotiations. It suggests providing sufficient time for evaluation, clarifying the proposed settlement agreement, and allowing employees to be accompanied during meetings.
In summary, settlement agreements are valuable tools in resolving employment disputes, provided they adhere to statutory requirements and are fairly negotiated. They offer a structured way to end employment relationships on mutually acceptable terms while protecting the rights of both parties.