What is a Settlement Agreement?
A Settlement Agreement is a legally binding contract entered into between an employer and an employee. They are regularly used in employment where there is some form of dispute between the parties. The purpose of a Settlement Agreement is to record in writing the terms agreed on between the parties to settle that dispute, e.g. in respect of the employee’s termination of employment or any other workplace issue (such as alleged discrimination or unpaid wages).
While the majority of settlement agreements regulate the termination of an employee’s employment, they do not need to do this: they can be used to resolve any potential employment claim the employee has, even where the employment relationship is to continue.
Settlement agreements can be used at any stage of a dispute, including after an Employment Tribunal claim has been raised.
Why use a Settlement Agreement?
Settlement Agreements can often be an attractive means of resolving a dispute so as to avoid claims being raised before an Employment Tribunal. They allow the parties to arrive at a resolution at an early stage so as to avoid the time, inconvenience and cost that would otherwise be incurred should an employee’s claim proceed to the Employment Tribunal. They also provide parties with a better opportunity to keep control of a situation, through negotiation of a compromised settlement, rather than run the risk of being unsuccessful at tribunal.
What does a Settlement Agreement actually do?
In signing a Settlement Agreement, an employee is agreeing to waive their right to enforce a particular legal right and to pursue a claim against their employer. In return, the employer will provide the employee with some form of consideration (usually although not always financial compensation) to compensate them for waiving that right.
There are certain requirements that a Settlement Agreement must fulfil to be valid and legally binding:
- It must be in writing;
- It must relate to a particular employment complaint (or complaints) or employment proceedings;
- The employee must have received independent legal advice (usually from a solicitor) as to the effect of his acceptance of the agreement on his ability to pursue the rights being waived;
- The agreement must identify the relevant laws governing Settlement Agreements and state that their requirements have been complied with; and
- The parties must sign the Settlement Agreement.
So long as these requirements are met, there will be a legally binding agreement. However, parties are free to include such other terms and conditions as they agree between them. Common examples of other matters that are regulated in a Settlement Agreement include:
- Post termination restrictions;
- What contribution (if any) the employer will make towards the employee’s legal fees in taking the required legal advice;
- The provision of a reference; and
- Tax issues.
However, there are no restrictions on what relevant issues can be covered off.
Advantages for employees?
A Settlement Agreement allows an employee to receive compensation in respect of some dispute or complaint which may have arisen during the course of employment. This allows the employee to avoid bringing costly and time consuming employment tribunal claims as well avoiding the risk that a tribunal may not find in the employee’s favour. Where the employee’s employment has terminated, resolving matters in this way can also ensure that the employee receives some form of income when they are out of work without receiving a regular wage.
Advantages for employers?
Use of Settlement Agreements can be commercially advantageous, allowing an employer to avoid the costs and potentially negative publicity associated with defending any employment claims brought by a disgruntled employee. The effect of a valid and legally binding Settlement Agreement precludes an employment tribunal hearing any claims later brought by that employee. Use of a Settlement Agreement allows an employer to settle any such claims and employee has at that time, but it is also routine for Settlement Agreements to also prevent an employee bringing certain other types of
Cumulatively, a Settlement Agreement often represents a clean break for both employer and employee. For an employer, knowing that a potential legal challenge is avoided can help free up time and resources for actually running their business and serving your customers or clients.
How Miller Samuel Hill Brown can help?
While incredibly useful, there are a variety of issues and factors which arise through the use of Settlement Agreements which must be considered. The one thing that parties must ensure is that the agreement properly sets out what has been agreed and all related issues are properly covered off. A defective agreement can cause significant headaches for both parties.
Our experienced employment lawyers can provide comprehensive and tailored advice on Settlement Agreements for employers and employees alike, guiding you through the common issues that arise where a Settlement Agreement in under consideration, as well as advising you of the effect any Settlement Agreement will have on yourself or your business.