SETTLEMENT AGREEMENT
ADVICE FOR EMPLOYERS
WHAT ARE SETTLEMENT AGREEMENTS?
A settlement agreement is a binding contract between the employer and employee (or other parties to a statutory claim) which aims to settle a case or refrain from instituting or continuing with certain proceedings.
Previously called compromise agreements and compromise contracts, these were renamed as settlement agreements in all relevant pieces of primary legislation on 29 July 2013.
Instead of the involvement of an ACAS conciliation officer there is the additional safeguard that the employee must have received independent legal advice on the agreement. In order to make sure both sides are represented fairly, is also wise for employers to seek specialist advice from an employment law consultant for settlement agreements.
Not all claims can be compromised by means of a settlement agreement. Accrued pension rights and claims for future personal injury plus a number of other claims may not be settled.
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WHEN CAN THESE CLAIMS ARISE?
These claims may arise on recruitment, during employment or on termination. In many cases, the employer will want to make a payment to the employee in return for an effective waiver of such claims and to avoid undertaking lengthy procedures to reach the same end.
This may happen where employment is continuing but it is most common for the parties to do so where employment has terminated (or is about to do so).
Contractual and other common-law claims that an employee may have can be waived by entering into a contractual waiver of such claims.
However, any agreement to settle or waive most statutory claims will be void unless it is:
- Agreed through ACAS and finalised by way of a COT3 agreement.
- Recorded in a settlement agreement (previously compromise agreements and compromise contracts) that complies with certain statutory requirements.
- An agreement to submit to arbitration under the ACAS arbitration scheme for unfair dismissal claims, providing the agreement is reached with the assistance of an ACAS conciliation officer or by means of a valid Settlement Agreement.
For this reason, it’s wise to get employer advice to deal with settlement agreements from a qualified solicitor.
THE NEXT STEPS
Sometimes, none of these options is appropriate. In these rare instances, a practical approach for the employer is to obtain protection from claims by delaying part of the settlement payment until the time for bringing the relevant claims has expired.
However, an employer should use this option as a last resort. One consequence of the introduction of the Early Conciliation process is that an employer may not receive notice that a claim has been issued against it for a considerable period after the limitation date has expired.
Note that from 23 July 2013, pre-termination negotiations are inadmissible in evidence in an ordinary unfair dismissal case unless there has been “improper behaviour” by a party. This rule operates alongside the existing common-law rules on without prejudice discussions.
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FURTHER INFORMATION
STATUTORY REQUIREMENTS FOR A SETTLEMENT AGREEMENT
For a settlement agreement to be valid certain conditions must be met:
- The agreement must be in writing.
- The agreement must relate to a “particular complaint” or “particular proceedings”.
- The employee must have received legal advice from a relevant independent adviser on the terms and effect of the proposed agreement and its effect on the employee’s ability to pursue any rights before an employment tribunal.
- The independent adviser must have a current contract of insurance or professional indemnity insurance covering the risk of a claim against them by the employee in respect of the advice.
- The agreement must identify the adviser.
- The agreement must state that the conditions regulating settlement agreements under the relevant statutory provisions have been satisfied.
NEGOTIATING SETTLEMENT AGREEMENTS
When negotiating a settlement agreement it is usual to specify that all communications should be treated as “without prejudice” and “subject to contract”. The purpose of this is to ensure that:
- The parties can speak freely in negotiations without fear of anything said being used in evidence against them should the negotiations break down.
- Neither party is legally bound by anything “agreed” in the negotiations until a final written agreement is actually signed.
PRE-TERMINATION NEGOTIATIONS: ADMISSIBILITY IN UNFAIR DISMISSAL CASES
“Pre-termination negotiations” may be protected from admissibility in unfair dismissal proceedings unless there has been “improper behaviour”.
Protection from admissibility includes the very fact that pre-termination negotiations have taken place, not just the details of those negotiations.
However, pre-termination discussions are not inadmissible “on any question as to costs or expenses, of evidence relating to an offer made on the basis that the right to refer to it on any such question is reserved”.
ALLOWING TIME TO CONSIDER OFFERS
The ACAS code states that parties should be given a reasonable period of time to consider the proposed settlement agreement and that, as a general rule, 10 calendar days should be allowed to consider the proposed formal written terms of a settlement agreement and to receive independent advice, unless the parties agree otherwise.
ADVISER'S CERTIFICATE
A waiver of claims in a settlement agreement will not be valid unless the employee has received independent legal advice on the effect of the agreement, in particular on their ability to bring the claim(s) in question.
It has become common practice for employers to require, as a condition of the agreement, that the employee’s adviser signs a certificate to confirm that they meet the criteria for a relevant independent adviser under the legislation and have given the necessary advice.
LEGAL COSTS
It is usual for the employer to make a contribution to the employee’s legal costs.
However, there is no statutory obligation on the employer to pay. The going rate varies depending on locality and the seniority of the employee.
A payment of legal costs will be exempt from income tax if the costs are incurred exclusively in connection with the termination of employment and either:
- A court or tribunal has made an order for the fees to be paid; or
- The employer is required to pay the fees under the terms of a settlement agreement and payment is made directly to the lawyer.
THE BENEFITS OF SETTLEMENT AGREEMENTS
From the point of view of a business, once a settlement agreement is signed, the employee will no longer be able to issue a claim in the employment tribunal or other court arising out of, or in connection with, the termination of their employment.
Also, a settlement agreement can be a relatively quick and straightforward process compared with an employment tribunal, which is usually lengthy and stressful. Additionally, an understanding between the Employer and the employee on how much compensation will be paid out can be reached.
HOW WE CAN HELP
With years of experience in corporate solicitor consultancy for settlement agreements, we can advise you in relation to whether it is appropriate for you to commence a protected conversation with one or more of your employees. If so, we can also outline the steps you’ll need to take to maximise the prospect of a successful outcome.
Our expertise in offering settlement agreement advice for employers means we can assist your company with the negotiation, drafting and successful conclusion of settlement agreements for employees at all levels. We’ll also ensure that the agreements that we draft and prepare protect the continuing needs of your business.
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