What is a settlement agreement?
Compromise agreements (as they were previously known) were first introduced in 1993 and are an exception to the general principle set out in all employment legislation that an individual cannot contract out of their statutory employment rights.
After July 2013, compromise agreements were rebranded as settlement agreements. This was to bring the terminology in line with other civil courts within the UK.
Under the terms of the agreement, the employee (or worker) waives statutory and contractual claims against the employer. In exchange for this waiver, the employee receives a one-off termination payment, which may include a statutory and/or contractual redundancy payment and/or a payment in lieu of notice (PILON).
To be a valid waiver of such claims, the settlement agreement must comply with the statutory conditions as laid out in section 203 of the Employment Rights Act 1996 (and various other legislation, depending upon the type of, or types of claim, being settled).
In summary, these requirements are:-
- The agreement must be in writing
- The nature of the dispute being settled must be specified within the agreement, i.e. the particular claims being compromised
- The agreement must include a statement confirming that the conditions governing settlement agreements have been complied with
- The employee must have received independent legal advice on the settlement agreement. This must be from a person who is qualified and insured to provide it, such as a specialist employment law solicitor. The settlement agreement must also identify who gave the employee advice on the terms, meaning and effect of the agreement
Common terms within Settlement Agreements
The following terms are fairly standard in all settlement agreements:-
- A statement regarding whether the employee will work out their notice, be placed on garden leave or paid in lieu of working their notice, i.e. receive a PILON
- Details of any ex-gratia/tax-free sum, or other compensation which the employee will receive. In return, the employee provides a tax indemnity to the employer in respect of any tax due. Genuine compensation for loss of office can generally be paid tax free up to the value of £30,000 pursuant to sections 401-405 of the Income Tax (Earnings and Pensions) Act 2003 – http://www.legislation.gov.uk/ukpga/2003/1/section/403
- A warranty that the employee agrees not to pursue and discontinue any legal proceedings in the Employment Tribunal or in the Civil Courts
- A confidentiality clause concerning the terms and existence of the agreement and seeking to preserve the confidentiality of any information to which the employee had access during employment
- A promise from the employee to return any company property and delete any confidential information stored on personal devices
- A promise not to make or publish any disparaging/derogatory remarks or comments concerning the employer, its officers or employees
- Clarification on whether any existing post-termination restrictive covenants will continue to bind the employee or not
- A reference (most employers provide basic, factual reference only)
- Confirmation that the employee has received independent legal advice
Frequently, a settlement agreement will exclude the following claims:-
- Latent personal injury, i.e. personal injury claims of which the employee was not aware and could not have been reasonably aware at the date of signing the agreement.
- Accrued pension rights under the occupational pension scheme – although such a claim normally rests with the trustees of the pension scheme, as they are responsible for administering the same.
- To enforce the terms of the agreement.
How can Centurion Legal help you?
A settlement agreement can be helpful if:-
- you are looking to part ways with an employee without the risk of a claim; and/or
- the employee has threatened to lodge a Tribunal complaint against you or has actually done so.
A settlement agreement brings finality to the matter and peace of mind for the employer.
We have also acted for many employers where they are restructuring their organisations, which results in redundancies. In such a situation, settlement agreements can be an amicable way to part company, usually in exchange for an enhanced termination payment.
Dealing with terminations in this way is often more commercial in terms of achieving the desired result in a quicker timeframe. It can also help minimise disruption to your business.
A settlement agreement can only be a valid waiver of claims pursuant to employment legislation if you receive advice on the terms, meaning and effect of the agreement from a “relevant independent adviser” as defined by law.
Centurion Legal can advise you pursuant to these requirements, provided the employer makes the normal, customary contribution for your advice (usually a minimum of £300+VAT). Assuming your employer does so, we will not normally charge above the employer’s direct contribution unless:-
- you would like us to try to negotiate anything other than minor changes to the agreement; and/or
- you are unhappy with the level of the termination payment and would like help to negotiate this – we always do so with the caveat that the employer could withdraw the offer of a settlement agreement, so you must be prepared to take this risk if you are unhappy with what is on offer.
DISCLAIMER: This document is intended to be a guide to the current law only. It does not constitute legal advice and you are not entitled to rely upon it. You should always take proper legal advice relating to your own situation before acting.