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What is a settlement agreement and when can I use one?

Employees benefit from immense legal protection under the statutory framework of UK employment law.

Therefore, employers are often essentially made to go through rigid disciplinary, capability or redundancy dealings if they are to evade unnecessary claims in the Employment Tribunal and legal costs related with defending these proceedings. It is worth taking into consideration that a lone case of unfair dismissal could cost your business up to £94,000 and there is no limit on compensation in discrimination cases.

What is a settlement agreement?

To aid the current UK employment law, a settlement agreement is a useful tool allowing employers a legally protected method of terminating an employee’s employment without having to undertake possibly long-drawn-out disciplinary, capability or redundancy procedures.

A settlement agreement, or compromise agreement as they were formerly known, is a legally binding, confidential agreement between an employer and an employee. The employer will give the employee a sum of money (a severance payment) and, in response, the employee settles to surrender any legal claim they may have against their employer, whether it be caused during period of employment or the termination thereof.

Did you know: A settlement agreement is only valid if the employee has had legal advice on it

The purpose of a settlement agreement is for the employee to renounce all their rights to bring a claim. This puts the employee at risk of giving up rights that may not have considered. The employee should get legal advice to protect their rights and to ensure that they employer is being fair in the settlement agreement.

What is the advantage of using a settlement agreement for employers?

As well as, employees waiving their legal right to claim, a settlement agreement can include more than just a sum of money for this to happen. For example, the employer may request that the employee should:

  • Not bad-mouth the provisions
  • Abide by their confidentiality clauses in the contract

Under what circumstances might an employer use a settlement agreement?

Settlement agreements are used by employers in numerous situations; for example, when they have concluded that a group of their employees need to be made redundant:

  • The employer is worried about the grounds being used for making them redundant; or
  • The length of time it will take to go through a legal employment law procedure, involving warning times, and joint and individual discussion before notice can be given.
  • Can be used for underperforming employees who would otherwise need to go through a proper performance improvement strategy – but the employer wishes to terminate the contact before this time.

What are the risks of offering a settlement agreement?

A settlement agreement is not always the answer to your employment law problems. There are some situations that make having a settlement agreement risky, exposing the incautious employer to unexpected liability.

Where an employer offers an employee a settlement agreement unexpectedly, without formerly raising concerns regarding the employees conduct or performance, there is a risk that employers may claim that such discussions and any supporting documents supplied are “confidential”.

If the employee has a “protected characteristic” (e.g. sex, pregnancy, race, disability or age) and is claiming less favourable treatment or harassment, there is the risk of them bringing a claim of discrimination. In such circumstances, the settlement agreement and the correspondence and conversations associated with it will not be given such legal protection.

What happens if either party breaches the settlement agreement?

An example of this is if the employer does not pay the agreed sum to the employee within the time frame outlined. This is a scenario where by the employee might wish to bring a tribunal claim under way, irrespective of the Settlement Agreement.

If either party is certain of t the other party breaching the agreement, they can bring a claim in the civil courts or the employment tribunal. However, they can only bring a claim in the employment tribunal if the settlement agreement was entered before the termination of employment.

Contact JMR Solicitors in Manchester For Advice on Your Settlement Agreement

If you have received a settlement agreement, you will need to make sure you receive legal advice on it. Contact JMR Solicitors for legal employment advice today.

We advise clients throughout the UK on Settlement Agreements.

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