What is a settlement agreement?

Settlement agreements (previously known as “compromise agreements”) are commonplace but not always fully understood. So, exactly what are they?

Put simply, a settlement agreement is a legally binding contract between an employer and employee that can be used to resolve employment disputes. They involve an employee agreeing not to pursue specific legal claims against their employer, as set out within the agreement. The employee will usually receive a sum of money from the employer in exchange for signing and might also receive additional incentives, such as a written reference.

In this article, we cover the key points for employers and employees to know about how settlement agreements work, plus a step-by-step guide to how the process works and what each party needs to do.

Are you an employer or employee looking for advice on a settlement agreement? Please contact Miranda Mulligan in our Employment law team, who will be happy to help.

Key points for employers and employees to know about settlement agreements

• Settlement agreements are mostly used when an employee’s employment is ending (e.g. through termination or redundancy) but can be used when employment continues.
• They can be used to address specific problems that have arisen or as a protection against potential claims (e.g. for unfair dismissal in redundancy situations).
• For a valid settlement agreement, the employee must receive independent legal advice (usually from a solicitor) before signing.
• If the employee does not receive this independent legal advice, then the agreement will not be enforceable.
• For this reason, employers tend to contribute towards employee’s legal costs.
• Settlement agreement negotiations usually happen as either ‘protected conversations’ (in relation to claims for unfair dismissal) or can be held “without prejudice”, once a dispute has arisen.
• This means anything discussed cannot be referred to in any subsequent legal disputes.
• However, the contents of a protected conversation can be disclosed for discrimination claims or if the employer acts improperly (e.g. by pressuring the employee to agree) unless otherwise covered by the without prejudice rule.

How to agree a settlement agreement: A step-by-step guide for employers and employees

Step 1: Deciding if a settlement is a viable solution

When considering proposing a settlement agreement, you should always get expert legal advice first. An employment lawyer will be able to tell you whether this is a suitable option for your situation or whether there are alternatives.

Step 2: Proposing a settlement

It is usually employers who will propose a settlement agreement but employees can do so as well. This will usually happen within a protected conversation or as part of resolving a dispute.

Step 3: Holding a protected or without prejudice conversation

Whichever party wants to propose a settlement agreement should ask the other to attend a protected or without prejudice conversation as relevant. Anything disclosed in such a conversation cannot be relied upon in any subsequent proceedings, allowing matters to be discussed openly.

Employees have no legal right to be accompanied in a protected conversation, but employers often give the option of bringing a co-worker, a trade union representative or a trade union official.

Step 4: Drafting the settlement agreement

If both sides agree in principle to a settlement, then an employment lawyer will need to draft an agreement. Usually this would be the employer’s solicitor as they will normally be the ones proposing a settlement. The agreement can be drafted before the protected conversation, providing a basis for discussion, or afterwards, based on what has been agreed verbally.

Step 5: Ensuring the employee receives independent legal advice

The employee must receive independent legal advice before signing or a settlement agreement will not be valid. Employers typically facilitate this by contributing to employees’ legal costs. Employees should be given reasonable time to consider the offer, with Acas recommending a minimum of 10 days for this.

Step 6: Finalising the terms of the settlement agreement

The employee’s legal representative may advise them to sign the agreement or propose amendments. Any amendments must be agreed by both parties under advice from their legal representatives to create the final settlement agreement.

Step 7: Signing the agreement

Once a settlement agreement has been reached, both parties will sign and it becomes legally binding. The employee will be bound not to bring an employment claim in relation to the matters covered in the agreement and the employer must comply with their obligations, such as any agreed payment to the employee.

What if a settlement agreement cannot be reached?

If a settlement cannot be agreed between the parties, then the employer is at risk of the employee taking legal action against them. This would involve either making a claim to an Employment Tribunal or through the courts, depending on the nature of the claim.

Before a claim can be heard by an Employment Tribunal, the matter will usually need to be referred to the Advisory, Conciliation and Arbitration Service (Acas). They will attempt to help the parties agree a settlement if at all possible.

If you are still unable to reach an agreement, then the employee can make a claim to an Employment Tribunal for most workplace disputes.

How Longmores can help with settlement agreements

Longmores’ Employment Law team regularly supports employers and employees with settlement agreements.

We can assist employers with drafting the agreements, negotiating with employees and their legal representatives, and advise on the enforceability of an agreement if required.

Our experts can also provide independent legal advice for employees on settlement agreements, as well as negotiating the terms with an employer and their legal team when applicable.

Whatever your circumstances, we can provide pragmatic advice on your legal position and the terms of a settlement. That way, you can be confident of reaching a sensible conclusion to an employment dispute in the best way for your interests.

For expert advice on settlement agreements, please contact Miranda Mulligan in our Employment law team.

Please note the contents of this article are given for information only and must not be relied upon. Legal advice should always be sought in relation to specific circumstances.