To Settlement Agreement, or not to Settlement Agreement; the Pro’s and Con’s

Settlement agreements help to settle disputes between employers and employees. Hannah Dowd explains the pros and cons of having one.

Sometimes employers and their employees face disputes and various situations surrounding redundancies and ill-health. Therefore, legally binding agreements known as settlement agreements, or compromise agreements are often used to mitigate a situation. They are commonly used to settle a dispute about an employment issue but can also be used in situations relating to redundancies and ill-health.

What does a settlement agreement mean for employees?

For employees, a settlement agreement is a way of ensuring that an employer is legally obliged to pay a settlement sum, settlement agreements offer a guaranteed result, without the need for potentially lengthy and costly litigation, they often include a tax-free compensation payment – which can act as an incentive, payment of notice paid to the employee as a lump sum (PILON) and an agreed reference for prospective new employers. The non-contractual payments can also sometimes be negotiable.

What does a settlement agreement mean for employers?

For an employer, it prevents potential litigation. It also ensures peace of mind and limits the need for a Tribunal which can often be beneficial for an employer meaning their internal and administrative resources are not taken up by the process. Using a settlement agreement to put an end to a dispute can also prevent insurance policies being affected by ongoing litigation proceedings.

What must happen for a settlement agreement to be enforceable?

For a settlement agreement to be legally binding and enforceable, the agreement must meet certain conditions:

1. The agreement must be in writing;
2. There must be a clause to ensure that the employee takes legal advice from a qualified adviser, such as a Solicitor;
3. The agreement must also detail the name of the adviser within the document itself;
4. It should relate specifically to the reason for termination, such as redundancy or the complaint;
5. There must be an insurance policy/contract of insurance in place or professional indemnity held by the adviser to protect the employee from any ill advice; and
6. The agreement should always include a clause which highlights the legislation and statutory conditions which regulate a settlement agreement.

There are some common issues which employers face when offering a settlement agreement. The first is misunderstanding the “without prejudice” discussion and mistaking this for a protected conversation. Protected conversations can occur even when there is no existing dispute. The contents of a protected conversation or correspondence will not be able to be referred to in any proceedings if the only potential claim you have is one for unfair dismissal. So, if there is any concern that an employee may have a protected characteristic, has raised a protected disclosure or there may be a breach of contract claim then anything said as part of the “protected conversation” can be referred to and relied upon.

Confidentiality is a crucial part of any settlement agreement. This must be adhered to throughout the entire process, including any protected conversation before the agreement is drafted and following signature of the agreement by all parties.

Not all sectors are obligated to provide a reference for an exiting employee. However, some sectors such as financial services must do so under regulations. The reference provided must ‘in substance be true, accurate and fair’.

Does a settlement agreement mean there will be a settlement payment?

It takes a negotiation between parties to determine the compensation, which is often known as the settlement or termination payment. Other factors can also be negotiated such as the benefits and the reference.

The compensation amount will differ depending on length of service, discriminatory or unlawful treatment and if there is evidence to back these things up. The settlement payment amount will also be determined based on the risk that the employee poses to the business by not settling matters with a settlement agreement. Typically, settlement agreements will include a confidentiality clause, which requires the employee in question to keep both the existence and the terms of the agreement confidential.

For employers in particular, this confidentiality clause is considered as fundamental and is one of the most important clauses within a settlement agreement. This is to prevent the settlement becoming common knowledge, such as to other employees within the business which could potentially set a precedent for future disgruntled employees.

Settlement agreements can be used as an alternative solution to terminate an employee’s employment from a company, or as a form of protection for employers, whereby if a disgruntled employee leaves the business, part of the settlement agreement can be that the employee must not be bringing the company into disrepute.

However, it is important to remember that if negotiations breakdown and the employer and employee cannot reach an agreement the discussions may be unable to be used at any future tribunal hearings for unfair dismissal claims.

How Jackson Lees can help you

If you are an employer or an employee facing a dispute and feel like you need advice regarding a settlement agreement, you can contact Hannah and her team below.

Get in touch with Hannah