Settlement Agreements

A settlement agreement is a legally binding contract between an employer and employee. Essentially, the agreement states that the parties will end their relationship, with the employee waiving the right to make a claim in the Employment Tribunal in exchange for a ‘settlement’ which can comprise of money and/or benefits.

To be legally valid, a settlement agreement must:

• be in writing.
• relate to a particular complaint or particular proceedings.
• only be signed after the employee has received independent legal advice from an identified advisor who holds the required professional indemnity insurance.
• state that the conditions regulating settlement agreements under the relevant statutory provisions have been satisfied.

The absence of any one of these stipulations will render the agreement null and void. In the case of Palihakkara v British Telecommunications Plc UKEAT/0185/06, the Employment Appeal Tribunal ruled that a compromise agreement (the former name for a settlement agreement) did not settle claims under the Sex Discrimination Act 1975 or the Race Relations Act 1976 because it did not expressly state that the conditions regulating agreements under those statutes had been satisfied. The Court stated: “the absence of a clause confirming that the conditions in these discrimination statutes are satisfied is fatal … the statutes are plain and require a condition.”

There are several circumstances in which a settlement agreement provides a positive solution. You may have one or more grievances/claims and rather than go to the Employment Tribunal, you and your employer may agree to enter into a settlement agreement.

Situations which can lead to a settlement agreement include:

• unpaid wages, salary, or bonuses
• discrimination claims
• breaches of employment contract or statutory rights
• disagreements about poor performance

Highly skilled people who are in senior jobsmay find their position untenable following a merger or acquisition or a change in corporate strategy. A settlement agreement can provide an ideal solution, allowing parties to go their separate ways in an amicable manner.

A settlement agreement provides several advantages, including:

• you will avoid the stressful, expensive, and slow process of bringing a legal claim
• you can negotiate a positive reference
• unlike bringing a claim in the Employment Tribunal, the financial settlement is guaranteed
• you can negotiate for non-financial benefits as well as a financial settlement

Our expert team can advise you as to whether a settlement agreement is the right solution for your situation.

The following sums are usually included in a settlement agreement:

• contractual payments up until the end of employment
• payment in lieu of notice
• a termination payment, including an ex gratia payment
• bonus payments / share schemes/ long-term incentive plans (LTIPs)
• further sums as consideration for any confidentiality clauses and/or post-termination restrictions
• all other statutory/contractual claims that might arise in an employment situation

The most common non-financial term included in a settlement agreement is a positive reference. However, you can negotiate to receive gardening leave, a confidentiality clause (barring your former employer from saying negative things about you), a career coach, and work-related items such as your company car, mobile phone, and/or laptop.

Settlement agreements can be written in very formal language and can refer to sections of Acts and Regulations which you may never have heard of.  Therefore, it is important that you understand the effect of the settlement agreement. It is a legal requirement that you get professional advice on what the agreement means. It is also a legal requirement that your adviser signs the settlement agreement to confirm that advice has been given.

There is no going back once you have signed your settlement agreement. The settlement agreement provides for full and final settlement of all claims against the employer and money due to the employee.