A settlement agreement is a legally binding contract between an employee and employer which settles claims (usually present or future) that the employee may have against their employer. An agreement can only be recognised in law if an independent solicitor or adviser certifies the agreement. Our specialist employment team can advise you on your settlement agreement and your rights.
What is a settlement agreement?
A settlement agreement is a legally binding contract between an employee and employer which settles claims (usually present or future) that the employee may have against their employer.
A settlement agreement is usually used upon an employee’s termination or resignation or at the end of litigation brought by either party against the other.
Settlements are often reached as part of the Acas conciliation process and under section 18A of the Employment Tribunals Act 1996, an employee should contact Acas before instituting proceedings. Acas also provides some useful guidance on settlement agreements.
I need independent advice on my settlement agreement
Employees and employers should seek independent legal advice at the outset which will assist negotiations.
The employee must have received advice on the terms and effect of the agreement from an independent solicitor (or another adviser specified in the Employment Rights Act 1996, such as a properly certified trade union official). That adviser must be clearly identified in the written agreement.
Often employers will offer to pay an employee’s legal fees for the settlement agreement, however this will differ with employers and is not always the case.
We can offer a fixed fee for reviewing and advising you on your settlement agreement.
If you feel you have been negligently advised in relation to your settlement agreement, our professional negligence team can assist and advise you on your options.
Negotiating a settlement agreement
Settlement agreements are useful way of ensuring that disputes or possible disputes between the employer and employee are concluded without the need for either party to resort to legal action.
It is important that any discussions between the employer and employee about the proposed agreement meet certain legal requirements.
If the parties do not end up entering into the agreement, those discussions could end up being used as evidence in any legal proceedings which follow for example in unfair dismissal cases.
Section 111A Employment Rights Act 1996: Confidentiality of negotiations before termination of employment
(1) Evidence of pre-termination negotiations is inadmissible in any proceedings on a complaint under section 111.
This is subject to subsections (3) to (5).
(2) In subsection (1) “ pre-termination negotiations ” means any offer made or discussions held, before the termination of the employment in question, with a view to it being terminated on terms agreed between the employer and the employee.
(3) Subsection (1) does not apply where, according to the complainant’s case, the circumstances are such that a provision (whenever made) contained in, or made under, this or any other Act requires the complainant to be regarded for the purposes of this Part as unfairly dismissed.
(4) In relation to anything said or done which in the tribunal’s opinion was improper, or was connected with improper behaviour, subsection (1) applies only to the extent that the tribunal considers just.
(5) Subsection (1) does not affect the admissibility, 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.
Is a settlement agreement legally binding?
A settlement agreement is a legally binding contract between an employee and employer if it meets certain requirements (under section 203 Employment Rights Act 1996 and section 147 of the Equality Act 2010) e.g. it must be written and must specify the particular complaints or claims which the agreement is settling.
Requirements for a settlement agreement
In order to be a qualifying settlement agreement, the agreement must adhere to the following requirements:
- the contract is in writing;
- the contract relates to the particular complaint;
- the complainant has, before entering into the contract, received advice from an independent adviser about its terms and effect (including, in particular, its effect on the complainant’s ability to pursue the complaint before an employment tribunal) (and this is stated in the agreement);
- on the date of the giving of the advice, there is in force a contract of insurance, or an indemnity provided for members of a profession or professional body, covering the risk of a claim by the complainant in respect of loss arising from the advice (and this is stated in the agreement); and
- the contract identifies the adviser.
What is a settlement payment?
There is no specific amount of any settlement payment that should be paid and this will be agreed between the parties. Factors that can be taken into account include:
- how long the employee has worked for the employer
- why a settlement agreement is needed
- the potential liability and cost of bringing and defending a claim in the Employment Tribunal.
A settlement payment of up to £30,000 can often be paid tax-free but it is sensible to seek professional advice on the same.
Employers can make a payment on an “ex gratia basis” i.e. a payment the employer has decided to make to the employee rather than an obligatory payment under the contract.
Can a settlement agreement include a restrictive covenant?
There are different types of restrictive covenants that will appear in an employment contract, depending on the employer, the field of business and the employee’s role. There are various types of restrictive covenant depending on the action an employer wishes to keep an employee from doing which include:
- Non-compete clauses: these restrict an employee from joining a competing business after they have left.
- Non-solicitation and non-dealing clauses: these prevent an employee from enticing the employers’ customers, suppliers or other employees away after they have left.
- Confidentiality clauses: These make it unlawful for an employee to divulge sensitive, confidential information about the employer, its employees, clients or business.
If an employee already has restrictive covenants in his or her employment contract, it is common for these to be negotiated to be included in a settlement agreement. The employer may wish to negotiate stricter restrictions (which should still be reasonable) where the employee is now leaving employment, whereas the employee may request more favourable restrictions or complete release however this will depend on the parties’ positions and circumstances at the time of entering the settlement agreement.
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If you are an employer, employee, senior executive, or HR professional and require advice on any aspect of UK Employment law, get in touch so our employment team can assess the legal merit of your case and provide you or your business with bespoke UK employment legal advice.
Please note that your legal rights may be subject to limitation and thereby irreversibly time-barred if you fail to take legal action or defend a claim in time, in particular for Employment Tribunal and Court proceedings. You are strongly advised to seek legal advice prior to taking any steps in the employment tribunal or court procedural process. Do not delay in seeking legal advice.
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