Due to Covid-19 many businesses are having to consider redundancies. This inevitably increases the risk of an employee issuing a claim in the employment tribunal as a result.

However, to avoid the stress, time, and cost of litigation, employers and employees should consider entering into a settlement agreement instead.

What is a settlement agreement?

Settlement agreements, previously known as compromise agreements, are agreements between an employer and an employee, usually to end an employment relationship on agreed terms. In these legally binding contracts, employees waive their right to make a claim to an employment tribunal or court, in exchange for compensation from their employer. Typical claims waived include unfair dismissal, discrimination claims, and claims for redundancy.

When might I be offered a settlement agreement?

You may be offered a settlement agreement (or can request one) as part of a ‘confidential’ or ‘without prejudice’ conversation where the employer or employee feels that there is a problem with the employment relationship and they are looking to end the employment. Alternatively,  it may be offered at the end of the employment relationship, for example in a redundancy situation.

What are the benefits of taking a settlement agreement?

For employers, the agreement offers the certainty that the employee will not bring a claim against them once the employment ends. Settlement agreements typically include clauses dealing with any issues that are of concern to the employer e.g. confidentiality clauses.

For employees, it can guarantee them a financial payment without the need for litigation and can allow them to negotiate other benefits that an employment tribunal could not award such as an agreed reference, outplacement facilities, and an announcement to staff and clients explaining the reason for their departure.

Settlement agreements are typically a faster and more cost-effective method of resolving a matter, which benefits both the employer and the employee.

How do employers and employees reach a settlement agreement?

It is recommended that employers and employees discuss the possibility of a settlement agreement face to face and then confirm the offer in writing.

For the settlement agreement to be legally binding the following conditions must be met:

  • The agreement must be in writing.
  • The agreement must relate to a particular complaint or proceedings.
  • The employee must have received advice from an independent adviser, such as a lawyer or a certified and authorised member of a trade union.
  • The independent adviser must have a current contract of insurance or professional indemnity covering the risk of a claim by the employee in respect of loss arising from the advice.
  • The agreement must identify the adviser.
  • The agreement must state that the applicable statutory conditions regulating the settlement agreement have been met.

Employees should be given a reasonable amount of time to consider the agreement; ACAS states a minimum of 10 calendar days unless agreed otherwise.

The employee (or employer) does not have to agree to a settlement agreement or enter into a discussion about them – they are voluntary. The parties can negotiate a deal or decide that no agreement can be reached.

If a deal cannot be reached, depending on the nature of the dispute or problem, resolution may be pursued through a performance management process, disciplinary or grievance process, mediation, conciliation, or ultimately employment tribunals and courts could be utilized.

What does ‘without prejudice’ mean and how does it differ from a ‘confidential/pre-termination conversation’ under s111A of the Employment Rights Act 1996 (‘ERA’)?

Any discussions relating to a settlement agreement are usually described as being ‘without prejudice’ and may refer to s111A of the ERA. Broadly speaking, this means the content of the meetings or discussions are confidential and should not be disclosed to a court or tribunal as evidence until after the court or tribunal has reached its judgement. The aim is to allow the parties to try and settle any disputes without the need to bring a claim. There are differences to the two regimes, for example, the “without prejudice” rules do not apply unless there is an existing legal dispute between the parties, whereas ‘confidential or pre-termination conversations’ can be used where no dispute exists. However, there are limits to the protection afforded by both rules therefore legal advice should be sought.

Do I need independent legal advice before signing a settlement agreement?

They are not legally binding if an employee does not receive independent legal advice. Typically employers will offer a capped contribution towards the employee’s legal fees. A recent case concluded that a fee of £500 plus VAT is a reasonable minimum contribution.

Are settlement agreements confidential?

Yes, they usually contain confidentiality clauses which state that you cannot tell anyone about the agreement and / or its terms.

Will an employee pay tax on a settlement payment?

The compensation received under a settlement agreement can often be paid tax-free up to £30,000 as long as it is not a payment the employee would have been entitled to receive under their contract of employment. Any payment relating to unpaid wages, holiday pay or notice pay will be subject to deductions of Income Tax and National Insurance contributions in the usual way. Settlement agreements almost always include a clause to confirm the employee is responsible for any further tax and NI contributions and is liable to reimburse the Company in respect of these amounts.

What happens if a settlement agreement is breached?

If a party fails to comply with their obligations under a settlement agreement then they are in breach of contract and could be taken to court. They could be ordered to comply with the terms of the settlement agreement and/or to pay compensation and may have to pay all or part of the other party’s legal costs.

If an employee wants to make a claim against an employer, is there a time limit?

If an employee decides to pursue a claim rather than a settlement agreement, there are strict time limits that must be followed. Employment tribunal claims must generally be filed within a three month period. Once the time limit has passed, it can be very difficult to bring a claim and it is much more difficult to successfully negotiate after this time. The time period will be different for different claims.

If an employee wants to bring a tribunal claim, they must first notify ACAS via the Early Conciliation process. This ‘stops the clock’ so that the parties can try and resolve the dispute without the need for a claim being issued. If negotiation is unsuccessful the clock restarts. The individual must then decide whether or not to proceed with a claim within the correct time limit.

What is a ‘termination’ or ‘ex-gratia’ payment?

This usually refers to the financial compensation the employee receives as part of the settlement in return for waiving their right to bring a claim. Usually, this is paid as a single lump sum but it can also be paid in monthly installments, which will reduce or cease if/when the employee finds alternative employment.

How much does a settlement agreement cost and can Blaser Mills Law advise on settlement agreements?

Blaser Mills Law conducts work for both employers and employees and our expert employment team is skilled at negotiating settlement agreements from both sides.

With prices starting from £250 plus VAT, we can help you negotiate the settlement package and advise you on such matters as references, announcements, bonus entitlements, share options, pension payments and benefits.

For further information, please contact our employment team on +44 (0) 203 814 2020, or email James Simpson at jfs@blasermills.co.uk or Debbie Sadler on djs@blasermills.co.uk.