What is a Settlement Agreement?
A settlement agreement is an agreement that is reached between an employee and their employer to resolve a dispute between them arising from the employment relationship. It includes bringing an end to claims such as those for unfair dismissal or discrimination.
Section 203 (3) (c) of the Employment Rights Act 1996 regulates the validity of settlement agreements. This provides the following: The agreement must relate to the particular proceedings. (This means that the particular claims the employee might have against their employer must be identified within the agreement).
They should only be used when there are potential claims to be resolved and where there is a genuine dispute. It is not enough to rely on a written or oral agreement as this will not prevent ex-employees from bringing claims against the business at a later date.
Businesses can enter into a settlement agreement with an employee while they are still working for the company, but in most cases, their employment will have ended or be about to end.
What Are the Legal Requirements for a Valid Settlement Agreement?
Several conditions must be met for a settlement agreement to be legally binding. These are:
- The agreement must be in writing
- The agreement must relate to a particular complaint or proceedings
- The employee must have received legal advice from a relevant independent advisor, specifically on the terms of the agreement and the effect it will have on their ability to pursue any rights before an Employment Tribunal.
- The agreement must state that the conditions regulating settlement agreements have been satisfied.
Why Does the Employee Need To Receive Independent Advice on a Settlement Agreement?
As the employee is giving up their legal rights in the Settlement Agreement, they must be properly advised by a relevant independent advisor (such as a solicitor or accredited trade union official) for it to be legally binding. This protects both the employee and the employers.
Usually, the employer contributes to the cost of the legal advice that the employee obtains.
What Does a Settlement Agreement Usually Contain?
Apart from the legal requirements that are listed above, the contents of a settlement agreement vary according to the situation between the business and employee.
Common clauses that are found in a settlement agreement are:
- Compensation for loss of employment
- Waiver of claims by employee
- Re-assertion or the modification of existing restrictive covenants
- Indemnity from employee concerning tax and National Insurance Contributions
If your business is in a position where the working relationship has broken down with its employee and it is anticipated that the best solution for all parties is to agree on a negotiated exit from the relationship, we can help.
Our team can help you when creating a settlement agreement by:
- Reducing the risk as far as possible of any claims being brought against the business
- Ensuring that restrictive covenants protect the business from former employees taking away business, colleagues, or clients
- Negotiating the settlement amount and the terms on which it is offered
- Advising on terms and effects of the agreement and negotiating amendments
- Discussing any other terms, you wish to include on your behalf
Our friendly and highly experienced People Services team have a breadth of knowledge on settlement agreements.
