Settlement agreements are legally binding contracts
Settlement agreements (commonly known as compromise agreements prior to 2013) are legally binding contracts. They are drawn up to remove employees’ rights to bring a claim arising out of their contracts of employment to an Employment Tribunal or other court.
They will therefore contain the range of terms that are agreed between an employer and an employee, usually at the point the contract of employment is to be ended. Less commonly they can also be used to settle particular employment contract issues during ongoing employment. Settlement agreements can therefore be offered and accepted at any stage of an employment relationship.
- For a settlement agreement to be legally binding, the following conditions must be met:
- The agreement must be in writing.
- The agreement must relate to a particular complaint or proceedings.
- The employee must have received advice from a relevant independent adviser, such as a lawyer or a certified and authorised member of a trade union.
- The independent adviser must have a current contract of insurance or professional indemnity covering the risk of a claim by the employee in respect of any losses arising from the advice.
- The agreement must identify the adviser.
- The agreement must state that the applicable statutory conditions regulating the settlement agreement have been met.
In practice, settlement agreements that apply to an agreed termination of employment will normally include some form of payment to the employee.
This should be in the form of compensation for loss of office or entitlement and often include an agreed form of reference wording. Settlement agreements should however always be voluntary arrangements.
There is therefore no obligation upon any employer or employee to enter into any agreement that they do not wish to sign. Once a legally binding settlement agreement has been signed, the employee will be unable to bring an employment tribunal claim in relation to any type of claim that is listed on the agreement.
The ACAS Code of Practice on Settlement Agreements
The ACAS Code of Practice on Settlement Agreements sets out a number of guidelines for the parties to follow. In particular, it is designed to help employers, employees and their representatives understand the implications of Section 111A of the Employment Rights Act (ERA) 1996 in relation to the negotiation of settlement agreements.
The Code of Practice includes the following guidelines:
- Section 111A of the ERA 1996 provides that offers to end the employment relationship on agreed terms under a settlement agreement can be made on a confidential basis.
- This means that the offers and discussions surrounding a proposed settlement cannot be used as evidence in an unfair dismissal claim to an employment tribunal.
- Under section 111A, such pre-termination negotiations can be treated as confidential even where there is no current employment dispute or where one or more of the parties are unaware that there is an employment problem.
- Section 111A can also apply to offers of a settlement agreement against the background of an existing dispute. In such cases, the ‘without prejudice’ principle (where any offers made are expressly excluded from being referred to at a later date) can also apply.
- However, claims that relate to an automatically unfair reason for dismissal such as whistleblowing, union membership or asserting a statutory right are not covered by the confidentiality provisions set out in section 111A.
- Claims of discrimination, harassment, victimisation or other behaviour prohibited by the Equalities Act 2010, or claims relating to breach of contract or wrongful dismissal are also not covered by the confidentiality provisions.
- The confidentiality provisions of section 111A are also subject to there being no improper behaviour by either of the parties during the discussions.
- Parties should be given a reasonable period of time to consider the proposed settlement agreement. As a general rule, a minimum period of 10 calendar days should be allowed to consider the proposed formal written terms of a settlement agreement and to receive independent advice, unless the parties agree otherwise.
What Quest can do for you
The process to reach a settlement agreement with an employee can be difficult and complex. Quest HR can help with all aspects of advice in relation to settlement agreements and can also act as your independent legal adviser if you so wish. To keep up to date with legislation don't forget to use the links on our legislation page. Contact us now for more information on our full range of products and services.
