Settlement agreements offer a mutually agreed-upon route for employers and employees to conclude their employment relationship.
For a settlement agreement to be legally binding and effective, it must meet several requirements, and there are practical considerations for employers during the negotiation process.
Understanding Settlement Agreements
A settlement agreement, also known as a compromise agreement, serves as a means to resolve or prevent workplace disputes between an employee and their employer. It usually outlines the terms of ending an employment contract, providing the employee with a negotiated severance payment in exchange for specific conditions. These typically involve relinquishing the right to bring future claims against the employer and agreeing to maintain the agreement’s confidentiality.
Settlement Agreements and Contracting-Out Provisions
Many claims that can be brought before an employment tribunal stem from statutory provisions. These provisions often include clauses, referred to as “contracting-out provisions,” designed to prevent parties from making agreements that purport to resolve claims, thereby removing the employment tribunal’s authority to adjudicate the dispute. These provisions can be found in various employment laws, such as the ERA 1996, the Trade Union and Labour Relations (Consolidation) Act of 1992, and the Equality Act of 2010 (EqA 2010). Their primary purpose is to safeguard the rights of claimants.
These contracting-out clauses enforce the fundamental principle that agreements prohibiting individuals from pursuing claims with an employment tribunal are void to that extent. However, there are two exceptions to these rules:
- When the agreement is reached with the support of an ACAS officer following ACAS Early Conciliation.
- When the agreement complies with the statutory requirements for a legally binding settlement agreement.
Claims Unresolved by Settlement Agreements
Not all claims can be resolved through a settlement agreement. The following types of claims typically cannot be waived using such agreements:
- Certain claims under TUPE, including failures to inform and consult and failures to provide employee liability information.
- Certain claims under the Agency Workers’ Regulations 2010, relating to rights regarding basic working and employment conditions and access to vacancy information.
- Certain claims under TULR(C)A 1992, concerning the failure to comply with the duty to consult employee representatives on a collective redundancy.
Furthermore, employees cannot waive their rights to receive specific statutory entitlements and payments, such as statutory sick pay (SSP), statutory maternity pay (SMP), statutory paternity pay (SPP), statutory adoption pay (SAP), statutory shared parental pay (SSPP), and statutory parental bereavement pay (SPBP).
Why Use Settlement Agreements?
Settlement agreements are particularly useful when there’s no existing legal action or dispute between the parties. They allow for a clean and efficient resolution without the need for external entities like ACAS. Moreover, these agreements create legally binding contracts that can be enforced in court.
When to Use Settlement Agreements
Employment-related disagreements often lead parties to seek ways to avoid the expenses, uncertainties, and time involved in filing or responding to employment tribunal claims. Settlement agreements can be utilized when a dispute first arises, before a claim is submitted, or at any point in the tribunal process. Employers use them in various scenarios, including during redundancies, disciplinary actions, executive severance, and other workplace disputes or claims.
Settlement agreements can also be employed to resolve workplace disputes while maintaining the employee’s ongoing employment.
Making Settlement Agreements Legally Enforceable
For a settlement agreement to be legally binding, it must satisfy specific statutory requirements. These include:
- Being in writing.
- Relating to the specific proceedings or disputes.
- Ensuring the employee receives relevant independent advice.
- The legal adviser possesses insurance for any potential losses resulting from the advice.
- Identifying the legal adviser.
- Stating compliance with the relevant statutory provisions.
Failure to meet these conditions could render the settlement agreement unenforceable.
Settlement Agreement Contents
A settlement agreement should address the particular proceedings or disputes at hand. It outlines the obligations of both parties and provides clarity regarding terms of contract termination. This includes specifying the termination date, the agreed severance payment, handling of the notice period and outstanding holiday pay, and defining wording for a professional reference. Employees typically agree to keep the agreement’s terms confidential, refrain from speaking negatively about the company, waive certain statutory, contractual, and tortious claims, and return company property.
Independent Legal Advice
Employees must receive independent legal advice from a relevant independent adviser, such as a solicitor, before signing a settlement agreement. Advisers must be identified in the agreement and have insurance to cover potential claims arising from their advice. The agreement should also confirm that the settlement agreement’s requirements have been met.
Settlement Agreement Taxation
The taxability of a settlement amount depends on its value. Compensation for loss of employment can be tax-free up to £30,000, provided it is compensatory rather than contractual. Taxes may also be influenced by factors like notice payments and pension implications, making professional guidance essential for tax-efficient arrangements.
Negotiating a Settlement Agreement
When negotiating a settlement agreement, adhering to the Acas Code of Practice is crucial. The Code helps employers, employees, and their advisers understand the implications of the ERA 1996’s Section 111A, which governs pre-termination conversations. The Code offers guidance on what constitutes “improper behavior” and explains the interaction between the rule regarding pre-termination negotiations and the “without prejudice” rule.
Approaching Negotiations
Successful negotiation is vital in reaching a settlement. Most employment disputes are resolved through negotiation, with monetary compensation being the primary remedy. A solicitor’s role is to promote their client’s interests by cooperating with the other party’s solicitor, managing expectations, and recognizing what the other party needs from the settlement. Negotiations must also consider their potential admissibility in future tribunal or court proceedings.
Conduct of Pre-termination Negotiations
Adhering to good practices during pre-termination discussions is advisable. This includes explaining the reasons behind proposals, allowing sufficient time for evaluating the agreement, and conducting face-to-face discussions at agreed times and locations. While not legally required, allowing employees to be accompanied at meetings is considered good practice. If a settlement agreement is rejected, alternative resolution methods should be explored.
Settlement Agreement Breaches
The agreement should specify the consequences of breaching its terms. Failure to meet the obligations under the agreement can result in a claim for breach of contract, potentially leading to the repayment of payments made by the employer and covering legal fees incurred due to the breach.
Voluntary Nature of Settlement Agreements
Settlement agreements are voluntary, and employees cannot be coerced into signing them. They must seek independent legal advice before agreeing to such an arrangement. However, employees who reject reasonable offers may risk facing costs awarded against them in tribunal proceedings.
Determining a Fair Settlement
The fairness of a settlement depends on various factors, including contract terms, the presence of a valid claim, the reason for contract termination, employee conduct, and the parties’ objectives. Any offer should be broken down to understand the calculation behind it. Certain claims, such as discrimination claims, may command higher compensation. In cases of compulsory redundancy, settlements are often limited to statutory levels.
Breaches of Settlement Agreements
Breach of the settlement agreement’s terms can lead to claims for breach of contract, potentially resulting in repayment of payments and legal fees. Agreements should outline the consequences of breaching the terms.
Taxation of Settlement Amounts
The tax implications of a settlement amount depend on its value and nature. Compensation for loss of employment can be tax-free up to £30,000, provided it is compensatory rather than contractual. To achieve tax efficiency, considerations like notice payments and pensions should be factored in.
Negotiating Settlement Agreements
Negotiating settlement agreements requires adherence to the Acas Code of Practice, understanding the interests of both parties, and managing expectations. The approach should promote cooperation and objectivity to achieve mutually beneficial outcomes.
Pre-termination Negotiation Guidelines
Compliance with good practices during pre-termination discussions includes explanations behind proposals, allowing sufficient time for evaluation, and conducting discussions at agreed times and locations. While not mandatory, allowing employees to be accompanied is advisable. If an agreement is rejected, alternative resolution methods should be considered.
This comprehensive guide provides insights into the essential aspects of settlement agreements, helping employers and employees navigate the process effectively.