Settlement Agreements

Whether you run or work in a global business or in a small or medium sized one, there can be situations when employers and employees need to part company. There has been much talk of recession in recent months and that tends to go hand in hand with businesses considering redundancies or lay-offs. Whatever the reason for an employee and a business to part company, the termination of a contract of employment is, perhaps, not as easy as it seems.

When we are discussing termination of employment in this sense, we are not looking at situations where there is any element of misconduct which would involve disciplinary procedure followed by dismissal. We are looking at situations where the employee’s contract of employment ends in a negotiated and transparent way. One of the ways such a termination can be dealt with is through a Settlement Agreement.

What is a Settlement Agreement?

A Settlement Agreement is an agreement between an individual employee and their employer bringing the employee’s contact of employment to an end. Settlement Agreements are widely used in redundancy situations, and they can also be used in any situation where there is a dispute between employee and employer that cannot be otherwise resolved.

It is also important to understand that an employee can instigate the use of a Settlement Agreement to resolve a dispute. A Settlement Agreement can be offered at any time during the employment relationship and is not limited to time of distress.

In addition, whilst Settlement Agreements can be used to bring a contract of employment to an end, they can also be used to settle a dispute. For instance, if there is a dispute about holiday pay and how it is calculated, a Settlement Agreement can be used to set out the specifics and when signed the process for making the calculations would then be used going forward.

What are the key elements of a Settlement Agreement?

There are a number of key elements that make up a Settlement Agreement. These are:

• It must be in writing
• Both parties must sign it
• It will form a legally binding contract between the employer and employee
• It usually has an element of payment to the employee
• It may have the requirement for the employer to supply a reference to the employee
• The employee will waive their rights to an employment tribunal
• It is an agreement entered into voluntarily by both parties

Sometimes, a Settlement Agreement will have an enhanced financial settlement. This is usually where there is a redundancy situation where the employer will offer enhanced financial terms for a speedy termination of the employee’s employment.

Once a Settlement Agreement has been entered into, the employee can no longer make a claim to an employment tribunal in respect of any of the items which are contained in the Settlement Agreement.

What makes a Settlement Agreement binding on the parties?

There are a number of pre-requisites that make a Settlement Agreement binding. The following items MUST be present:

• The Settlement Agreement must be in writing
• It must relate to certain specific complaints or events
• The employee must receive advise from an independent advisor such as a qualified solicitor or certified and authorised trade union member/official
• The independent advisor must have professional indemnity insurance
• The Settlement Agreement must identify who the independent advisor is
• It must state that the applicable statutory conditions relating to Settlement Agreements have been met

When agreement has been reached, the employee must be allowed reasonable time to consider the terms of the agreement and to seek independent legal advice.

Are Settlement Agreements compulsory?

Settlement Agreements are not compulsory. If an employer and employee are unable to agree the terms of the agreement, the employee cannot be forced to enter into it.

In addition, if the negotiations surrounding the settlement agreement do not reach a satisfactory conclusion, the discussions and negotiations surrounding the Settlement Agreement usually cannot be used in any employment tribunal which is asked to decide on unfair dismissal.

Even though the employer and employee may have agreed the terms of the Settlement Agreement in their own negotiations, the solicitor providing independent advice to the employee can make recommendations for changes to the agreement and the employee can then ask the employer to make those changes. However, the employer is not bound to make those changes.

If you do find yourself in a difficult employment position and your employer has suggested you should consider a Settlement Agreement, it is particularly important to seek independent legal representation to ensure you are fully protected. If you wish to discuss your situation and whether a Settlement Agreement you have been offered is right for you, please contact us.