Legal

What employers need to know about settlement agreements

11 Oct 2021 By Tom Moyes

While settlement agreements can be a useful tool, there are certain things businesses should be aware of before they offer one to an employee, says Tom Moyes

If you offer an employee a settlement agreement (also known as a compromise agreement) you should be aware that an employee will be required to seek advice from a lawyer and often try to maximise their compensation. 

What is a settlement agreement?

A settlement agreement is a document that allows an employee to agree with their employer not to pursue an employment tribunal claim, and not to initiate legal proceedings in the future.

This document can effectively and efficiently bring an end to an employment relationship and, through successful negotiation between advisers, usually secure a mutually beneficial and amicable solution for both parties. From an employer’s perspective they offer a quick solution and avoid having to waste management time going through onerous consultation, disciplinary or performance management processes.

A settlement agreement is often used to record the terms of an employee’s departure from their employment where, typically, they receive a termination payment (up to £30,000 of which may be tax-free) in return for the waiver of current and potential statutory or common law claims against their employer.

Meeting conditions

For a settlement agreement successfully to waive rights, certain statutory conditions must be met:

  • The agreement must be in writing.

  • It must relate to a ‘particular complaint’ or ‘particular proceedings’ – in other words, the claims waived must be identified.

  • The employee must have received independent legal advice on the agreement and, in particular, on its effect on their ability to pursue the statutory rights/claims that are intended to be waived.

  • The adviser must be identified in the agreement.

  • The adviser must have insurance in relation to the advice.

  • The agreement must state that the legislative conditions regulating settlement agreements have been met.

So what?

While a settlement agreement is a very useful tool, it can’t be used to compromise an employee’s claim for accrued pension rights, claims for latent/future personal injury, or claims to enforce a settlement agreement under breach of contract.

If you offer an employee a settlement agreement, they should seek legal advice from a solicitor or other suitably qualified adviser before the agreement can become binding. The solicitor may be required to sign the agreement, or a separate certificate, to confirm that independent legal advice has been secured.

As an employer it’s likely that you’ll need to make a contribution to the cost of your employee consulting a solicitor to discuss the settlement agreement. Employers should be aware that in many cases a solicitor will be able to recover the full cost of taking legal advice.

Protected conversations

Since July 2013, employers have also been allowed to have what are commonly described as ‘protected conversations’ with employees.

This allows you to discuss the possible termination of an employee’s employment (under the terms of a settlement agreement) without fear that the conversation will be referred to in an employment tribunal. It’s worth noting that the legislation describes these conversations as ‘Pre-Termination Negotiations’ and this point is not always fully understood. 

Unless termination lies at the heart of the conversation it will not be ‘protected’ and the conversation may later be referred to in an employment tribunal. The regime of protected conversations is never available in cases involving alleged discrimination. An employer can instead seek to rely on the without prejudice rule, but will need to seek legal advice before doing so as the regime can be complex. 

Tom Moyes is a partner in the employment team at Blacks Solicitors

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