What is a settlement agreement?

And why one could be beneficial to both employers and employees.

Why settlement agreements can be important to both employees & employers

A settlement agreement is a contract entered into between two parties to a dispute or potential dispute, which records and implements the terms on which the parties agree to settle the dispute or potential dispute.

What are the conditions regulating settlement agreements?

Settlement agreements are governed by the Employment Rights Act 1996 legislation and the conditions regulating them are:

  1. The agreement must be in writing;
  2. The agreement must relate to the particular proceedings;
  3. The employee or worker must have received advice from a relevant independent adviser as to the terms and effect of the proposed agreement and, in particular, its effect on his ability to pursue his rights before an employment tribunal;
  4. There must be in force, when the adviser gives the advice, a contract of insurance or an indemnity provided for members of a professional body, covering the risk of a claim by the employee or worker in respect of loss arising in consequence of the advice;
  5. The agreement must identify the adviser; and
  6. The agreement must state that the conditions regulating settlement agreements are satisfied.

What terms are included?

The terms within settlement agreements vary from one agreement to another but usually include a term whereby one party agrees to make a payment to the other party and in return that party agrees to waiver any claims they have against the other.

Other terms may also include the return of company property, warranties and indemnities, contributions towards legal fees, confidentiality provisions and other restrictions and agreed references.

In addition if one party holds a position of office, such as directorship, there may be a provision that that party, as part of the terms of the agreement, agrees to resign from office.

It is also possible, as part of the terms of the agreement, for goods, money and shares to also pass.

When are Settlement Agreements used?

There is a misconception that settlement agreements are offered only to troublesome employees. This is not true. Settlement agreements can be a good option to minimise risk to an employers finance and reputation, and can be attractive to an employee as they receive financial compensation for loss of employment.

Businesses may decide to offer a settlement agreement to an employee that is being made redundant. Although there may be a genuine redundancy situation and the procedure has been flawless, the employee may have sufficient length of service to bring a claim for unfair dismissal and offering a settlement agreement places the employer’s mind at rest.

This could also be the case where an employer has an employee with less than two years length of service who has been underperforming. Whilst the employee will have insufficient length of service for an unfair dismissal claim there may be reasons for the employees underperformance which are, attributable to one of the protected characteristics within the Equality Act 2010, and therefore, to avoid a possible discrimination claim, the employer may decide to offer a settlement agreement.

At Hunt and Coombs we regularly advise both employers and employees in respect of settlement agreements. Should you require any further advice then please do not hesitate to contact Nicola Cockerill on 01733 882800.

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This article has been prepared for general interest and information purposes only; it does not constitute legal advice and should not be relied on as such. While all possible care has been taken in the preparation of this article, no responsibility for the accuracy and/or correctness of the information and commentary set out in the article, or for any consequences of relying on it, is assumed or accepted by the firm or the authors.