Settlement Agreements can be used in many circumstances when an employment relationship comes to an end, but what exactly does it mean for employers and employees?
Here Hadrian HR’s Paul Lott explores what a Settlement Agreement, previously known as a Compromise Agreement until 29 July 2013, is and its importance.
A Settlement Agreement is a legally binding contract made between an employer and employee, either towards the end or just after the employment relationship has terminated. It sets out the terms between the parties, and once signed, prohibits the employee from bringing legal action against the employer in respect of their employment or termination. It is commonly in exchange for a termination payment and other benefits which are also set out in the agreement. Some circumstances where a Settlement Agreement may be used, whether or not there is a prior dispute, could include:
-Redundancy
-Performance management at work
-Long-term sickness
-Clash of personalities
-Transfer of a business
As a means of settling a grievance Each Settlement Agreement varies, but typically, some clauses deal with:
-The potential claims to be settled by the Settlement Agreement
-The payments that will be received and the relevant tax issues
-Confidentiality/non-derogatory comments
-Agreed reference
The main benefit of entering into a Settlement Agreement is to provide certainty between parties and encourage a clean, amicable, break. Settlement Agreements regularly make provision for the employer to pay more than the statutory minimum entitlement to the employee. However, it is beneficial for the employer to pay more as the Settlement Agreement gives the certainty of knowing there will be no dispute or claim afterwards.
If the employee doesn’t sign the agreement, they preserve their full rights to claim against their employer. Notably, with the outcome of many Employment Tribunal claims being uncertain and potentially costly. Therefore, a Settlement Agreement route facilitates a straightforward resolution of the ending of the employment relationship. PROTECTED CONVERSATIONS
Pre-Termination Negotiations – otherwise known as a ‘protected conversations’ – came into force at the same time as Settlement Agreements. They allow employers to have open discussions with employees about terminating their contracts, and anything said during the discussions is ‘protected’ and cannot be used by either party against the other in an Employment Tribunal claim.
There are exceptions, and a conversation is not necessarily protected in discrimination cases, whistleblowing or other automatically unfair dismissal claims. Meanwhile, the negotiations no longer have to remain off-the-record if either party misbehaves during the process, in which case what is said during the ‘protected’ conversation could come out into the open during a subsequent Employment Tribunal hearing.
LEGAL ADVICE
A Settlement Agreement will only become binding once the employee has received independent legal advice on its terms and the effects from an appropriate legal advisor, typically by a qualified solicitor, who has attached a certificate confirming the advice that has been given. It is customary for the employer to pay for this information, or at least make a significant contribution.
Once a Settlement Agreement is signed by all parties, including the legal advisor, it is as if an Employment Tribunal has made an order at a full hearing, and no further action can be taken.
Hadrian HR is an employment advisory team with specialist knowledge in both employment law and human resource management. Its team of specialists are on hand to provide advice on creating an equal environment for employees, with consultancy advice ranging from one off contracts to a full audit of current policies and provision of customised contracts and handbooks.
