A guide to settlement agreements

  • Insight

25 April 2017

What is a settlement agreement?

Settlement agreements – currently in the news – are typically an agreement where the employee is paid a sum of money in exchange for signing away claims against their employer.   

Such agreements are voluntary and can be offered at any time during the employment relationship or afterwards. Both parties may view a settlement agreement as a way of making a ‘clean break’ from the employment relationship, but they can also be used as a means of resolving an ongoing dispute in the workplace with an employee who remains employed.

A settlement agreement is one of the few means to legally prevent an employee or worker from pursuing certain statutory claims against an employer such as unfair dismissal and discrimination. Most other attempts to waive such claims even by written agreement are not enforceable.

What are statutory rights?

In the context of employment, employees have a number of rights that are created through legislation.

The main ones include the right:

  • not to be unfairly dismissed;
  • to be given holidays and paid holiday pay;
  • to a maximum working week;
  • to not to be discriminated against or harassed;
  • to be paid sick pay; and
  • to protection as a whistleblower.

Claims for breach of these statutory rights can be waived through a settlement agreement. Attempts to settle these claims that do not meet the relevant requirements for a settlement agreement may not be binding.

What is required for a settlement agreement?

There are certain requirements that must be met for a settlement agreement to be legally binding:

  • it must be in writing;
  • it must relate to a particular complaint(s) or proceedings;
  • it must be signed by the employee;
  • the employee must have received independent legal advice from a relevant independent adviser such as a solicitor or a certified adviser;
  • the adviser must be identified in the agreement;
  • the adviser must be insured in order to cover the risk of a claim from the employee in respect of any loss arising from the advice given;
  • the agreement must record that the requirements regulating the settlement agreement have been satisfied;
  • it is important to note that a “one size fits all” agreement that is not tailored to the individual circumstances may not be binding upon the employee.

Why is a solicitor needed?

It is important for employees to have a clear and thorough understanding of what they are agreeing to and also the effect which entering into the agreement will have on their future rights. However, the employee may understand the effect of the settlement agreement and feel there is no need to see a solicitor. Nonetheless, it is a legal requirement that the employee has received advice from a relevant independent adviser. If they have not received advice, then the agreement is not valid or binding on the employee – the employee could still pursue claims for unfair dismissal, discrimination, and holiday pay for example.

How much will it cost to enter into a settlement agreement?

The cost will vary from case-to-case.

Most employers will pay a contribution towards the cost of the legal advice (usually between £250 + VAT and £1,000 + VAT) provided that the settlement agreement is signed by the employee. Depending on how much advice is required, it may be that that contribution is sufficient to cover the legal costs.

The cost of defending a claim to the Employment Tribunal can be more expensive than coming to an agreement and therefore when appropriate, a settlement agreement can sometimes be a cost-effective tool. Equally, the cost of pursuing a claim and the potential awards can be outweighed by the settlement on offer from the employer, making it uneconomical to bring a claim.

What is the effect of a settlement agreement?

It is a legally binding agreement that can be relied on to prevent an employee from bringing subsequent claims that are expressly waived under the settlement agreement. A properly drafted and signed settlement agreement gives the employer the certainty of knowing that claims have been waived and enables a claim to be brought by the employer if the terms are not honoured.

Once validly signed, generally speaking, neither party can change their mind without the other party’s agreement.

From an employee’s perspective, the settlement agreement can normally be relied on to enforce a payment or right under the agreement against an employer.

Can an employee request a settlement agreement?

Yes. In the right circumstances, a settlement agreement can be a clean, cost effective, and amicable way of ending the employment relationship (or resolving a particular dispute while remaining an employee). The process of entering into settlement discussions can be instigated by the employee. It is up to the employer whether it wishes to agree to the terms offered and/or make a counter offer.

In certain cases, where the Advisory, Conciliation and Arbitration Service (known as Acas) is involved, a written agreement called a “COT3 Form” may be used and that can provide a more straight forward method of settling certain claims.

How do the negotiations work?

Negotiations can be carried out in a number of different ways to fit the scenario including:

  • meetings/correspondence between the manager and employee,
  • telephone conversation/correspondence between the two legal representatives,
  • mediation through a trained professional mediator,
  • Judicial Mediation through an Employment Tribunal judge,
  • correspondence via Acas.

However, whichever method is used, it may be important to ensure that negotiations are carried out on a without prejudice/protected basis/subject to contract.

What does without prejudice mean?

If something is said in a discussion or correspondence which is “without prejudice” it cannot be used in a court or tribunal as evidence. The “without prejudice” rule is designed to allow genuine attempts to settle a dispute. Admissions may be made during settlement discussions or correspondence by the parties in the knowledge that, because they took place in a without prejudice discussion, they generally cannot be used against them in evidence at a court of tribunal should the attempts at settlement fail and a claim like unfair dismissal be brought.

What is a protected conversation?

Protected conversations are similar to the “without prejudice” rule and allow parties to air certain views or make certain concessions during settlement discussions. However, there are some important differences. For example:

  • the without prejudice rule generally only applies to a live dispute between the parties – a conversation cannot come “out of the blue” and be protected under the without prejudice rule, whereas a protected conversation can be initiated (by either party) “out of the blue” without there being a live dispute,
  • a protected conversation must be a conversation in which potential termination of employment is being proposed, whereas a without prejudice conversation can include other methods of resolution without termination of employment necessarily being considered,
  • the protections in a protected conversation only apply to an unfair dismissal claim – whatever is said during that conversation could still be part of evidence in Tribunal if a discrimination claim (for example) is lodged, whereas, if the without prejudice rule applies, the protection can apply to a number of different types of claim.

Protected conversations are often used at the early stages of a performance concern being spotted in order to float a potential alternative to a formal performance management process. At that early stage there is often no live dispute but employers might, but for the protections offered in a protected conversation, be reluctant to put their cards on the table and propose an agreed departure. Employers can have a frank conversation but with reduced risk where it is a protected conversation.

What does subject to contract mean?

The use of the term is to emphasise that an offer or other things that have been said or written as part of negotiations is only provisional at that stage.

The phrase is helpful to show that parties have not yet reached binding agreement and are still in the process of negotiation or finalising what might have been agreed in principle.

However, the phrase is not fool proof. Whether a contract has formed will depend on the words being used and by parties’ conduct.

In the context of a settlement agreement, a binding contract will usually be formed once it is in writing and signed by both parties, but most Employment Tribunal claims will only be waived if all the requirements have been met – for these, see above: What is required for a settlement agreement?

Are there any exceptions for without prejudice or protected conversations?

Yes. There are various exceptions including, but not limited to, evidence:

  • of whether a settlement agreement has been concluded,
  • of misrepresentation, fraud, undue influence, perjury, blackmail or other unambiguous impropriety (such as acting in a way that is discriminatory),
  • to explain delay or apparent acceptance of wrongdoing by an individual’s action/inaction; and
  • for an application for recovery of the expenses involved in a claim.

What is a COT3?

This is a form from ACAS that settles a claim following conciliation by an ACAS conciliation officer.

Wording is included in the COT3 form that sets out an agreement between parties to settle a claim. The form of words is usually much simpler than a settlement agreement.

What can settlement agreements include?

Settlement agreements can deal with a wide range of issues; they don’t need to be restricted to waiving the statutory employment related claims (like unfair dismissal, discrimination, and holiday pay) in exchange for money. The following can also be dealt with:

  • entitlement to shares;
  • income protection, private health insurance, and other benefits,;
  • company property like cars, computers, and intellectual property;
  • references and announcements to staff;
  • restrictions on:
    • working for competitors,
    • enticing clients and employees away,
    • on what information can be disclosed to third parties, and
    • making certain unfavourable or critical comments about the parties;
  • certain claims for personal injury; and
  • certain rights in connection with occupational pensions.

Is the money paid under a settlement agreement tax free?

How much tax an employee pays on a settlement agreement sum will depend on a number of factors dependent on the relevant tax rules at the time.

Generally payments due under the contract of employment like holiday pay and notice pay will be subject to income tax and national insurance contributions, but there are exceptions.

If payment is made as compensation for losing employment and in other restricted circumstances, the employee may be entitled to receive £30,000 without deductions for tax.

There is often a clause in the settlement agreement which requires the employee to indemnify the employer in relation to any additional tax it might be asked to pay.  Whether this tax indemnity is included in the final agreement may depend on each party’s leverage in the negotiations.

How do you know if the settlement agreement is a good deal?

The decision to enter into a settlement agreement is a matter for each party. It is not the solicitors decision, but we can give advice on the offer, what options each party has available, and discuss a strategy. Even if the solicitor considers that it is not a good deal, you are still entitled to sign the agreement.

Normally an employee is incentivised to sign a settlement agreement by being given a payment or other benefits (such as a positive reference) as part of the agreement.  If an employee is not receiving any more than they are already legally entitled to in any event, there is little or no reason for them to sign the settlement agreement. However, whether it is worthwhile for the employee to sign will very much depend on the circumstances.

How long do you have to consider the terms of a settlement agreement?

There is no set period. ACAS recommends that employees are given a minimum of 10 days to consider the proposed conditions of the agreement, but ultimately it depends on the circumstances and the parties’ bargaining positions.

How much is statutory redundancy pay?

Statutory redundancy is calculated using a formula which is based on length of service, age, and weekly pay. There is a helpful calculator on the Government website.

What happens if the employee does not sign a settlement agreement?

If the settlement agreement is not signed and if a signature is a condition on the agreement being valid and binding, then the employee is free to pursue their claims.

If the employment continues, the employer may decide to terminate it using an alternative method to a settlement agreement and the employee could end up with nothing.

Can a Scottish solicitor sign an English settlement agreement?

The bulk of employment law is UK wide. There are a few contractual wrinkles with which we are familiar; we have considerable experience of acting for employers and employees based South of the border. There is no legal reason why a solicitor qualified in Scotland cannot sign off a settlement agreement governed by English law or one that relates to an employer who is based in England.

What is an adviser’s certificate?

The advisor’s certificate is not obligatory but it is very commonly used in order to have the adviser separately confirm that the employee has received legal advice.

An adviser’s certificate is the part of a settlement agreement that the employee’s adviser completes to confirm that they have advised the employee on the terms of the agreement and the effect of the agreement on the employee’s rights to pursue matters relating to the agreement in a court or tribunal. An adviser certificate will also normally state that there was insurance or indemnity in place covering the risk of a claim from the employee arising as a consequence of any advice given by the adviser.

What is 'garden leave'?

This term describes a period when an employee is asked to stay at home rather than at the place of work, but is still employed, paid and has to comply with all the remaining terms of their employment. The period usually starts when the employee has been given notice that their employment is to end. The period is designed to prevent them from having further access to trade secrets, access to key clients, key staff or sensitive information. Sometimes employees are asked to sign a settlement agreement at the start of 'garden leave' and again at the end of it when the employment comes to an end to ensure that the employer is protected for the whole period. In other instances, the termination date may, by agreement, be brought forward so there is no need for 'garden leave'.

What if a settlement agreement is not honoured?

If a settlement agreement is not honoured in any way, such as failure from an employer to pay the employee or failure by either party to abide by a confidentiality clause, then a claim for a breach of contract can be raised. The person suing will usually receive damages in the sum of money where there is a breach, but in some circumstances they can compel the other party to carry out their obligations under the agreement or prevent them from further breaching the terms.  If one party breaches the terms then the other party may be freed from having to comply with their side of the agreement.

Summary

A settlement agreement, on the right terms, can be an effective means to bring an employment relationship to an end amicably with limited conflict. Alternatively, it can be used to resolve an existing dispute or indeed prevent a dispute from arising. It is important to seek legal advice when entering into settlement agreements to ensure that the parties understand what is being agreed and what rights are being waived. Where an employee does not seek advice, there are certain claims which the employee will still be entitled to pursue because they will not have been validly waived.

Employment Tribunals can be costly and the outcome can be unpredictable. A settlement agreement may offer a more straightforward, cost-effective and speedy solution.

How can Anderson Strathern help?

We often assist individuals and businesses at an early stage to avoid settlement discussions becoming necessary. However, often settlement discussions are in in the parties’ best interests. 

We advise on potential claims, settlement agreements and settlement discussions on a daily basis. Whether you are an owner/manager of an organisation, an HR professional or an in-house solicitor; or an employee or employee representative; we have the expertise and years of experience to help you.

The services we provide relating to settlement agreements include:

  • providing an up to date and fully legally compliant settlement agreement tailored to the circumstances;
  • advising (employers or employees) on the prospects of claims and strategy;
  • guiding (employers or employees) through the protected conversation process;
  • negotiating (for employers or employees) and finalising the terms of the settlement agreement; and
  • representing either party should an Employment Tribunal or court claim be necessary.

Our advice covers the full range of employment law and our breadth of experience means that we are well placed to advise on all aspects of employment law from the most basic to the most complex of cases, for all sizes of employers and for all sectors. 

To find out how we can help you with a settlement agreement, contact