Settlement Agreements

Employment law, dismissal and redundancy agreement

Settlement agreements, sometimes known as severance agreements or termination agreements, can be entered into when an employee leaves employment - for example, through dismissal or redundancy. The purpose is to settle any claims the employee may have upon their leaving.

They can also serve as a means of settling other types of employment claims (e.g. claims of discrimination or harassment) against an employer, irrespective of whether the employment relationship has ended.

Entering into a settlement agreement involves the employee signing an agreement promising that they will not make any claims (e.g. for unfair dismissal) against the employer.

In doing this the employee agrees to waive their rights to bring a claim against their employer. However, not all claims can be settled by way of settlement agreements.

Generally, a settlement agreement is the only way an employee can waive their rights to pursue their statutory employment rights. An exception to this is when a settlement is reached following an ACAS conciliation.

Advantages of settlement agreements

Settlement agreements are attractive to employers as they mean they do not have to worry about any repercussions such as employment tribunals, and can also be desirable for employees as they may receive a handsome sum in compensation. Settlement agreements can be considered tantamount to the employer ‘paying off’ the employee to ensure no dispute will arise over dismissal, or to settle an issue which has already become apparent.

Another point in favour of settlement agreements is the ease and quickness with which they can be arranged, reducing the tumult for both sides and negating the need for court action.

The role of solicitors and other advisers

When a settlement agreement is drawn up, one condition is that the employee or worker must have received advice from an independent adviser. This adviser should be a qualified lawyer (such as a solicitor or barrister), a certified trade union or advice centre representative, or a person of such description as specified by order.

It is normal practice for the adviser to sign a certificate or letter to confirm that they have provided the employee with advice on the terms and effect of the agreement upon them, and upon the effect of the agreement on the employee's ability to pursue claims before the employment tribunal.  This certificate will also confirm that the adviser has the necessary insurance in place in respect of the advice given.

Ordinarily the adviser will provide advice on the amount of compensation that should be expected. The settlement agreement cannot be enforced unless the employee has received the required advice from an independent adviser.

Content of a settlement agreement

Examples of terms that a settlement agreement may contain include:

  • An amount of compensation offered to the employee
  • Assurances given by both the employer and employee
  • Indication that all terms have been accepted by the employee and that they will not take legal action in future
  • A letter of reference which can be used by the employee in future job applications.
  • A ‘non-compete’ clause which places some restriction on the type of jobs the employee is able to apply for in the future
  • Payment of tax
  • Confidentiality clause – i.e. that you cannot disclose some or all of the claims to anybody

The amount of compensation is purely down to the two parties and what they can agree to.

Rejecting the settlement agreement

The employee absolutely has the right to reject any offer of settlement, either on principle or because they feel the compensation offered is insufficient. In the case of inadequate financial renumeration, the employee can negotiate another settlement or pursue their claim to an Employment Tribunal.

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