How can Settlement Agreements benefit an employer?

Settlement agreements are more and more widely utilised when settling disputes or grievances between employers and their employees. Settlement agreements can also be used to end the employment relationship, or after the employment relationship has ended – either before or after proceedings have been issued. But how do settlement agreements actually benefit an employer?

​Employers should be aware of the main requirements of a settlement agreement and issues to consider before putting such an offer on the table.

At its core, a settlement agreement is a form of contract and accordingly must comply with s203 Employment Rights Act 1996:

1. The agreement must be in writing.

2. The agreement must be in response to particular proceedings or a specific claim being settled.

3. The employee must receive advice from a ‘Relevant Independent Advisor’ as to the terms and effect of the agreement. Most importantly, the employee must be advised of the agreement’s effect on the employee’s ability to pursue their rights before an employment tribunal.

4. The agreement must identify the relevant independent adviser and the adviser must be covered by a policy of insurance to cover the risk of a claim by the individual.

5. The agreement must confirm that the conditions for a settlement agreement as outlined about are satisfied.

Employers need to bear in mind that if the agreement is found unenforceable for failing to comply with s.203 ERA 1996, the employee will be able to bring their statutory claims i.e. unfair dismissal or discrimination at the Employment Tribunal but will still be prevented from bringing any contractual claims i.e. those arising out of an employee’s contract of employment.

HOW CAN AN EMPLOYER BROACH THE SUBJECT OF A SETTLEMENT AGREEMENT WITH AN EMPLOYEE?

The introduction of section 111A Employment Rights Act 1996 enables an employer to engage in confidential discussions with their employees regarding means of terminating employment without the threat that such correspondence being used in any claims against the employer. There does not need to be any formal dispute at hand, but it is prudent to bear in mind during the course of a disciplinary etc. that any offers or discussions of proposed settlement terms will be inadmissible in dismissal claims save for wrongful dismissal or discrimination claims.

The Advisory, Conciliation and Arbitration Service (Acas) warns that the confidentiality provisions of s.111A are subject to there being no improper behaviour such as harassment, discrimination or undue pressure.

Employers should note that Acas advises employees should be given a minimum period of 10 calendar daysto consider the proposed formal written terms of a settlement agreement and to receive independent advice. Further guidance from Acas on the implications of s.111A can be found at Acas Code of Practice on Settlement Agreements. 

​WHAT SHOULD BE INCLUDED IN A SETTLEMENT AGREEMENT?

Settlement agreements are intended to enable and employee and their employer to settle any employment claims arising out of statute or contract in consideration for a monetary sum and certain conditions and warranties being provided. Most importantly, for a settlement agreement to validly waive potential claims, the claims must be individually and expressly identified within the agreement.

The crux of the agreement is the waiver clause, however employers should be aware that there cannot be an absolute waiver of all claims and there are three categories of rights which are often expressly excluded from the scope of a waiver under a settlement agreement:

1. Right to claim for unpaid pension payable up to the point of termination.

2. Personal injury claims which the employee is not aware of at the time of entering into the settlement agreement.

3. The right to enforce the agreement for breach.

Alongside the above, an agreement will contain mostly standard terms; it will confirm the date of the employee’s termination and will outline the monetary sum being provided to the employee following termination.

​Termination payments benefit from being tax-free where under £30,000 however it is usual for there to be a clause in the settlement agreement whereby an employee will provide an indemnity to the employer to reimburse any tax paid by the employer where it is in relation to the termination payment.

Further, it is usual for there to be a confidentiality which ensures an employee does not use copy or disclose any confidential information that they may hold and the agreement confirms that the employee is to destroy any copies of confidential information they hold so as to render it unrecoverable.

Finally, it is normal for the employer to meet some or all of the employee’s legal costs on a settlement agreement and an employee will likely seek for a factual reference to be provided to any future employer.

It is worthwhile considering entering into a settlement agreement at an early stage. The benefits of doing so include:

1. It binds an employee with further obligations such as confidentiality which a tribunal cannot enforce.

2. It will save an employer the time and costs associated with defending a claim at the tribunal.

3. It can provide a clean break to an employment relationship that has irretrievably broken downEmployers should make sure that any agreement presented to an employee or any conversations preceding an agreement being entered into strictly abide by the relevant statutory provisions noted within this article to ensure that the agreement will be valid and enforceable. ​

MORE INFORMATION 

If you would like an expert lawyer to prepare or look over your company’s standard settlement agreement, Pinney Talfourd solicitors in Essex and London are here to advise and assist. We have an experienced and dedicated team of employment lawyers based in five offices across the county.

We offer late night and Saturday appointments, and our free initial telephone consultation allows you to explain the situation with an expert lawyer and discuss the best steps to minimise stress and delays. You can book your free initial employment consultation using our online booking form or by calling your local office.

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The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. The law may have changed since this article was published. Readers should not act on the basis of the information included and should take appropriate professional advice upon their own particular circumstances.​