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By Spencers Solicitors

  Lynn Collins    
  May 12, 2020

9 Key Facts About Settlement Agreements

The coronavirus pandemic is changing and has already changed the world as we know it, in so many ways. Few would argue that the global lockdown has been necessary. This doesn’t detract from the fact the crisis has caused massive disruption to the economy and for businesses and employees alike.

In the UK as many as 9 million workers are expected to be or have been, furloughed by their employers, meaning that they have been placed on ‘temporary leave of absence’ from their employment. Many employers have taken advantage of the Government’s Coronavirus Job Retention Scheme. Under the terms of this scheme, employers can apply for a grant that will pay 80% of a furloughed employee's wages up to a maximum of £2500 per month.

Some employment law solicitors and other commentators envisage that in the coming weeks and months, as businesses attempt to stutter through the aftermath of the lockdown, businesses of all sizes will look to restructure. Re-structuring almost inevitably leads to job losses. Some of those who have been furloughed (and some of those who haven't been) may find that their positions become redundant.

At the same time, there is a universal acceptance that both business owners and their workers are hapless victims of the pandemic. There is likely to be an acceptance of the fact that some jobs will inevitably be lost and therefore a desire on both sides to deal with the parting of the ways in an as amicable, quick and mutually beneficial manner as possible. The Settlement Agreement may just be the ideal vehicle to facilitate this.

What is a Settlement Agreement?

A Settlement Agreement is a written contract between an employee and their employer. It is a legally binding agreement. Settlement agreements are used to outline the agreed terms on which the employee’s employment has been terminated.

Prior to entering into the agreement, the parties will have negotiated between themselves, detailed terms to be included in the written agreement. These terms usually provide for a severance payment to be made by the employer to the employee as consideration for the employee agreeing not to pursue a claim through the Employment Tribunals process. It is also common for one of the terms of the agreement to be that the employer will provide the employee with a reference.

Settlement Agreements by their very nature mean that both parties to the agreement have mutually agreed to this method of terminating an employee’s work contract. It is no coincidence that they used to be known as ‘Compromise Agreements’.

Here are Spencers solicitors 9 key facts to be considered by both employers and employees before they enter into Settlement Agreements.

  1. Settlement Agreements can be used to terminate someone’s employment for many different reasons, such as:
    • Where the employer/employee relationship has broken down and both sides accept that a parting of the ways would be best.
    • To settle a workplace dispute or grievance, including a discrimination claim, without it going to an employment tribunal.
    • Ill health on the part of the employee.
    • Employee struggling with change even after having been supported.
    • Poor performance of employees.
    • Employee requests termination for personal reasons.
    • Where there is a clash of personalities between specific employees.
    • Redundancy ( likely to be used where the employer has agreed to pay enhanced redundancy payments. It’s unlikely that Settlement Agreements would be used where the employee is only going to receive statutory redundancy payments).

  2. For a Settlement Agreement to be legally binding there are certain criteria that need to be met:
    • It must be a written agreement
    • The agreement must relate to a specific complaint, proceedings or other reason for terminating someone's employment.
    • The employee must take advice from a suitable independent adviser on the terms and effect of the proposed agreement.
    • The independent adviser must have a current contract of insurance or professional indemnity insurance.
    • The agreement must name the adviser.
    • The agreement must state that the statutory provisions which set out the above conditions regulating the validity of the settlement agreement have been satisfied.

  3. Settlement Agreements are usually successfully brought to fruition by means of negotiation. They are entirely voluntary. An employee who has been offered terms on a Settlement Agreement does not have to accept the first offer put to them. Most agreements are settled by each party making offers and counteroffers.

  4. They are voluntary. Some people faced with the offer of a Settlement Agreement feel that they have no choice but to agree to it. That isn’t true. An employee is quite within their rights to refuse to accept an offer of one.

    This may lead to other alternative procedures being used by an employer such as performance management, disciplinary or grievance procedures or even mediation. However, the whole reason for employers usually wanting to enter into Settlement Agreements, is to avoid the legal minefields that some of these other types of procedure can involve.

  5. The Employment Rights Act (ERA) s111A provides that offers to end a contract of employment by means of, amongst other things, the use of a Settlement Agreement, can be made confidential. The importance of this is that the terms and the discussions that took place to try and reach an agreement can be made confidential so that they cannot be referred to as evidence in an unfair dismissal case that goes to an Employment tribunal hearing.

    However, in a potential discrimination case or a claim for unfair dismissal following whistleblowing disclosures, discussions aimed at achieving an agreement can be disclosed to any subsequent tribunal.

  6. An employee who is offered terms under a proposed Settlement Agreement must be given sufficient time to take advice and consider any offer. This period should be a minimum of 10 calendar days (by virtue of the ACAS Code of Practice on Settlement Agreements).

  7. For a Settlement Agreement to be valid, an employee must have received advice from a relevant independent adviser, before they enter into the agreement. The adviser can be:
    • A fully qualified lawyer
    • An authorised trade union official
    • A certified and authorised advice worker

  8. The cost of the employee seeking legal advice should be contributed to by the employer. This should be agreed as a condition of even considering the terms of a proposed Settlement Agreement and indeed the draft Agreement should contain a clause to this effect. In most cases, the agreed contribution towards the adviser’s fee will be sufficient to meet the full amount.

  9. As a final point, it is important to note that in general, once a Settlement Agreement has been signed, there is no going back on it and an employee will not be able to bring any type of claim against the employer at some future date. The Settlement Agreement brings finality.

When considering taking legal advice on the terms of a proposed Settlement Agreement, it's vitally important to seek out the services of a specialist employment law solicitor.

Spencers employment solicitors team regularly provide advice to clients who are considering entering into Settlement Agreements with their employers. Contact us on 08000 93 00 94 or online.

If you are an employer who is thinking of offering a Settlement Agreement to an employee and you need legal advice on drafting an agreement, then our expert Employer Solutions team are the people to speak to – it’s the same number 08000 93 00 94.


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