Guide to Settlement Agreements

Settlement agreements, formerly known as Compromise Agreements, came into effect in July 2013. They are legally binding contracts waiving an employee’s rights to make a claim against their employer at a court or an employment tribunal for something covered in the agreement.

What are settlement agreements, and when are they used?

A settlement agreement is typically entered into towards the end, or just after, an employee’s employment has ended and sets out the terms of separation between the parties. In return for the employee waiving their rights, the employer will typically pay the employee an end payment, although this is not always the case.

Neither party can be coerced into entering a settlement agreement or into any discussions about them. It is usual for there to be a process of negotiation and for both sides to make proposals and counterproposals in order to create an agreement. Employees should be given a reasonable amount of time to consider the proposed terms of the settlement agreement. The ACAS Code of Practice recommends a minimum period of 10 calendar days unless agreed otherwise. If there are good reasons to depart from the ACAS Code, such as the need to maintain momentum in discussions, this can be done by agreement.

Confidentiality clauses can also be found within settlement agreements in order to protect the business interests. These can be negotiated and must be fair, but stops the employee from sharing information both inside the business and outwith. 

Pre-termination discussions

If settlement negotiations are attempting to settle a pre-existing dispute, under the ‘without prejudice’ rule they cannot be referred to in any subsequent Court or Employment Tribunal proceedings. However, there is scope to argue that discussions do not fall within such protection on the basis there may not be a pre-existing dispute.

In 2013, and in order to provide an additional layer of protection for pre-termination discussions, new rules were introduced. Under the rules, settlement discussions cannot be mentioned or referred to in any later ‘ordinary’ unfair dismissal proceedings, regardless of whether there is a pre-existing dispute. This protection does not apply to any other type of claim, it also does not apply in cases of ‘improper behaviour’, which includes:

• All forms of bullying, harassment and intimidation, including using aggressive behaviour or offensive words.
• The threat of physical assault or physical assault and any other criminal behaviour.
• Any form of victimisation.
• Discrimination because of sex, age, race, disability, sexual orientation, transgender, religion or belief, pregnancy and maternity, and civil partnership or marriage.
• Putting any undue pressure on another party. For example, not giving a reasonable time for consideration of the settlement proposal within the ACAS Code, or an employee threatening to undermine a company’s public reputation if the business refuses to sign the agreement. Although ‘whistleblowing’ protections under the Public Interest Disclosure Act apply here.

In some circumstances where unlawful discrimination occurs during a settlement discussion, it can form the basis in itself of a claim to an employment tribunal.

Conditions that need to be satisfied to make a settlement agreement legally binding

In order to ensure a settlement agreement is legally binding and for a valid waiver of statutory employment rights, the following criteria must be satisfied:

• The agreement must be in writing.
• The agreement must relate to a specific complaint or proceedings.
• The employee must have obtained advice from an independent legal adviser, such as a solicitor, in particular on its effect on their ability to pursue the statutory right in question.
• The legal advisor must have a current insurance contract or professional indemnity covering the risk of a claim by the employee regarding any loss arising from the advice. It is usual for an employer to cover the employee’s legal fees or at least contribute towards them.
• The agreement must indemnify the adviser
• The agreement must confirm the statutory conditions that regulate the settlement agreement have been met

Settlement agreement meetings

In most cases, employers will arrange a ‘without prejudice’ meeting with their employee so they can discuss whether there is potential for a settlement agreement. Employees may want to involve a third party to accompany them; this could be a work colleague or trade union representative, although there is no statutory right to this. It is good practice to allow this since it often helps settlement discussions to progress.

If the employee rejects the settlement agreement, some other form of resolution is likely to be sought. This could be via performance management, disciplinary or grievance process, depending on the nature of the dispute.

Tax implications

The employee may need to obtain tax advice in relation to the payments that are made under the settlement agreement. Ex gratia payments that genuinely represent compensation for losing employment can be made up to £30,000 incurring no tax liability. Wages, holiday pay and bonuses can be paid through normal payroll.

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