A settlement agreement is a legally binding contractual agreement between an employer and an employee that can be used to resolve disputes and settle specified claims an employee may have against an employer in a mutually acceptable way.
It usually involves agreeing to the termination of the employee’s employment but can be used to settle a dispute where the employee remains employed.
The agreement sets out the terms and conditions agreed between the parties. It usually provides for the employer to make an additional financial payment above any statutory or contractual rights the employee may have and/or provide other benefits, such as an agreed reference, in return for the employee entering into the agreement.
A settlement agreement can provide a quick and dignified end to an employment relationship without the need to bring a claim in the Employment Tribunal and can avoid the cost, delay, disruption and risk to employers of instigating and following dismissal procedures.
Our employment team can advise employers who are considering bringing an employment relationship to an end, from initial discussions with the employee to drafting the agreement and ensuring all legal requirements are complied with so that a valid settlement agreement is entered into.
For information on how we can help employees with settlement agreements, please see our Settlement Agreements for Employees page.
A settlement agreement is voluntary, an employee is under no obligation to agree to it. The employee should be given a reasonable period, ACAS recommends a minimum of 10 calendar days, unless agreed otherwise, to consider the terms of the agreement and receive independent legal advice. For pre-termination settlement negotiations (under section 111A of the Employment Rights Act 1996) this period must be adhered to, otherwise it may affect the admissibility of discussions if an unfair dismissal claim is brought.
This legal principle can be relied upon where there is an existing employment dispute between the parties. It means that any statements made during a ‘without prejudice’ meeting or discussion cannot be used in a court or tribunal as evidence. It allows a frank and open discussion between the parties without fear it may be relied on, for example, to bring a constructive unfair dismissal claim.
This only applies where there is an existing dispute and the conversations are genuinely aimed at resolving that dispute. If there is no dispute, it will not apply.
To allow greater flexibility, s111A of the Employment Rights Act 1996 introduced ‘protected conversations’ which can take place where there is no existing dispute. However, the protection of not being able to refer to such discussions only extends to any subsequent unfair dismissal claim. If other claims were to be brought, such as discrimination, the conversations could be referred to. The protection does not apply if there is any ‘improper behaviour’, such as saying they will be dismissed if rejected.
There is no specific sum or formula to calculate what an employee should receive. The sum offered will depend on the specific facts and circumstances which have led to the parties negotiating the terms of the settlement agreement and the risk of any successful claims.
A typical agreement will usually contain the following:
The employer will usually require the employee to keep the terms of the agreement (and often the circumstances leading up to it) confidential. However, the employee will usually be permitted to tell their immediate family or other specified parties about the circumstances of the termination of their employment providing they also keep the information confidential.
The employee will remain an employee unless the contract of employment is terminated in another way by either party. An employer must not threaten dismissal of an employee who wishes to negotiate terms or refuses to sign. Any such conduct is likely to be disclosable to the Employment Tribunal and may lead to successful claims by the employee.
The next steps for both parties will depend on the reasons why the employment contract was being terminated in the first place and appropriate advice should be sought to understand the risks of the different potential courses of action. The employer may decide to commence or continue with an alternative process such as disciplinary action or redundancy.
If the employee does not have any post termination restrictions in their contract of employment the employer may try to include new terms within the settlement agreement. However, the employer will need to make an additional payment to the employee for any new post termination restrictions which the employee will be bound by.
The law is an employee must receive independent legal advice on the terms and effect of a settlement agreement and its impact on the employee’s ability to pursue claims before entering it. If the parties sign the agreement but the employee does not receive legal advice, the employee is still able to make a claim against the employer in the Employment Tribunal, as the settlement agreement will not be a legally binding document.
In addition to the above, for the agreement to be legally binding, it must:
Although there is no legal requirement for an employer to pay the employee’s legal costs, it is usual for the employer to contribute towards the employee’s cost of obtaining advice.
For a basic agreement where the terms of settlement are agreed, a contribution is usually made from £500 plus VAT upwards. This should be confirmed in the settlement agreement.
This contribution covers the employee receiving advice on the terms and effect of the agreement on them. It does not cover any wider advice e.g., whether the settlement offered is good/sufficient or if the employee should accept the offer. If the agreement is not straightforward or further negotiations are required to finalise the agreement, there may be an additional cost to carry out this work which is likely to exceed the employer’s contribution and may not be paid by the employer, but this is open to negotiation.
Sometimes a settlement agreement needs reaffirming at a later date, often if the employee is placed on garden leave, for which there is likely to be an additional cost.
A settlement agreement is in full and final settlement of all claims the employee may have against the employer, save for some specified excluded claims. If a claim is brought after the parties have signed a valid settlement agreement, it is unlikely the Employment Tribunal will consider the claim and the employee is likely to be in breach of contract.
It is usual for a settlement agreement to contain provisions where if the employee does bring a claim, they indemnify the employer for its costs and legal fees of defending the claim. Further, depending on the wording of the settlement agreement, the employee may be liable to repay the compensatory payment to the employer.
The agreement is without prejudice until it is signed by both parties, at which time it becomes a binding legal contract. It is therefore important both parties are happy with the terms before it is signed. If either party breaches the terms of the agreement, the innocent party can bring a claim against the other to enforce the terms of the agreement and/or for any losses they may suffer because of the breach. The agreement once signed is an open document and can be used as evidence in proceedings.
