What Are Settlement Agreements And When Can They Be Used?

Year Published: 2018

Settlement Agreements are commonly used to end an employment relationship in a mutually agreeable way. They are often used in situations where an employer and employee feel their relationship has broken down and whilst employers tend to make the initial proposal, either party can make the first move.

Warren Moores, Employment Law & HR Solicitor at SAS Daniels

Warren Moores, Employment Law & HR Solicitor

A Settlement Agreement can also cover non-employees. For example, someone who alleges they were discriminated against at an interview. It is important employers seek legal advice on how to propose a Settlement Agreement as the rules relating to the disclosure of settlement negotiations in legal proceedings are very technical and can be a minefield to navigate.

What provisions surround Settlement Agreements?

Settlement Agreements and any discussions around them are regulated by two provisions:

  • The ‘without prejudice’ principle – this covers existing disputes; and
  • Section 111A of the Employment Rights Act 1996 – this covers situations where there is no existing dispute (‘a Protected Conversation’).

Depending on which method is used, if the employer engages in what is known as ‘unambiguous impropriety’ (under the without prejudice rule) or ‘improper behaviour’ (under s.111A) then the veil of protection can be lifted and the employee could argue that the employer’s actions of offering a payoff are unlawful and use such facts to make a claim.

Despite the rules being different under each provision, behaviour such as putting the employee under undue pressure to sign the Agreement or engaging in discriminatory behaviour would be covered by both. It is also important to note that the protection under section 111A relates to unfair dismissal claims only. This means that, for example, if the employee raises a claim of discrimination the discussions would be disclosable.

When making an offer of a Settlement Agreement the employer should inform the employee that they do not have to enter into the Agreement if they don’t want to. However, on the other hand, the employee should be made aware of what may happen if they do not enter into the Agreement. For example, the company could investigate their concerns further in respect of the issue at hand.

A reference is often a key concern for the employee in settlement negotiations and one can be agreed as part of the Agreement. Ordinarily in law an employer has no legal requirement to provide a reference.

Why use a Settlement Agreement?

There are a number of situations when employers may find offering a Settlement Agreement suitable. These could include:

  • Performance Management – It can take up to 6 months or longer for an employer to fairly dismiss an employee on performance grounds. Therefore, some employers choose to make a settlement offer as an alternative to going through this process; and
  • An allegation of gross misconduct – If the evidence against the employee is questionable, then dismissing an employee could be risky and the company could be left with the time, hassle and cost of dealing with the claim.

How to make an offer:

When an employer makes a confidential offer of a Settlement Agreement, they should provide this in writing so the employee can fully consider the proposal. The communication should be headed either ‘Without Prejudice’ or ‘Protected Conversation’ to clarify that such documents fall under the relevant protection. Usually if the employee wishes to accept the proposal, they will inform the employer and at that stage the employer should ask their legal adviser to draw up the official Settlement Agreement.

An employee’s right to independent legal advice:

During the process an employee must seek advice from a relevant independent legal adviser on the terms and effects of the proposed agreement. This is a legal requirement and without it the Agreement will not be legally binding. To prove that the employee has taken advice, the independent legal adviser is required to sign an ‘adviser certificate’ which then forms part of the Settlement Agreement.

What else do you need to know?

A well drafted Settlement Agreement should list the types of claims the employee is compromising by signing it. Putting every single claim that could possibly be compromised, without specific relevance to the situation, could lead to the Agreement not being enforceable.

There are some claims a Settlement Agreement cannot compromise, including:

  1. Accrued pension rights in respect of occupational pension schemes;
  2. Personal injury claims that the employee has no awareness of;
  3. Preventing an employee making a protected disclosure (known as blowing the whistle).

Employers should also be mindful that the tax treatment of payments under Settlement Agreements recently changed on 6 April 2018.

A Settlement Agreement needs to be specific to the individual situation and therefore employers should obtain advice from an employment law specialist from the outset on how and what to offer as well as drawing up the actual document.

Overall, Settlement Agreements are a very useful tool which can usually save time and effort on both sides.

For more information and advice on Settlement Agreements, please contact Warren Moores in our Employment Law & HR team on 0161 475 1225.

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