What is a settlement agreement?
A settlement agreement is a contract between an employer and an employee where the employee agrees to settle any potential claims they have against their employer in return for the employer agreeing to pay them financial compensation or other benefits.
When will a settlement agreement be appropriate?
An employee can make a claim against their employer under both their contract of employment and under various pieces of legislation. These claims can arise either during the recruitment process, in the course of employment or when the employment has come to an end.
Where an employee raises a claim which an employer wants to settle, the employer often chooses to make a payment in return for the employee waiving their potential complaints. This involves entering into a settlement agreement with the employee, normally where the employment has or is about to end although it is possible to settle potential claims whilst the employee remains (and continues) to work for the employer
Possible content of a settlement agreement
The terms of a settlement agreement are predominantly at the discretion of the parties entering into it. Examples of common clauses include:
- A contribution by an employer to an employee’s reasonable legal fees
- A waiver of claims by the employee, including a warranty that the claims listed in the agreement amount to the only claims which the employee has against the employer
- A reassertion or modification of restrictive covenants
- An indemnity from the employee in relation to liability for any tax and national insurance contributions
- In the case of directors and officers, a clause requiring their resignation from office
Due to the importance of an employer preserving the confidentiality of its sensitive business data, settlement agreements often
contain confidentiality provisions which apply once the employee has departed. Examples of these include an employee agreeing:
- Not to use any confidential information
- Not to disclose any confidential information to any person, company or other organisation
- To keep the terms and existence of the agreement confidential
- Not to make any derogatory comments about the employer (or any individuals employed by it) to a third party
What types of claim can be settled under a settlement agreement?
A significant number of statutory claims can be settled by a settlement agreement including claims for unfair dismissal or discrimination. It is important to obtain clear advice on the claims being raised however, given that certain claims cannot be
settled under a settlement agreement.
Which types of claim cannot be settled under a settlement agreement?
Examples of the types of claims which it is not possible to settle under a settlement agreement include some types of:
- Personal injury claims
- Pension claims
- Claims following the transfer of business
What are the legal requirements for a valid settlement agreement?
For a settlement agreement to be legally binding, there are a number of conditions which must be met:
- It must be in writing
- It must relate to a particular complaint or particular proceedings
- The employee must have received legal advice from a relevant independent adviser (for example, a qualified lawyer or union official on:
- The terms and effect of the proposed agreement; and
- Its effect on their ability to pursue any rights before an Employment Tribunal
- The independent adviser must have a current contract of insurance or professional indemnity insurance which covers the risk of a claim against them by the employee for the advice they have given
- The employee’s adviser must be identified in the agreement
- The agreement must state that the conditions regulating compromise agreements have been satisfied.
We are highly experienced at advising employees on settlement agreements and looking at the terms in order to check whether it is in the employee’s best interests to sign. If you have been asked to sign a settlement agreement by your employer, feel free to contact a member of our team who will be more than happy to guide you through the process in order to secure the best possible terms for you.
If you would like to speak to someone about your situation, Glaisyers are here to help. We offer a no obligation, free initial consultation.