A settlement agreement (which used to be called a compromise agreement) is a legally binding contract between an employer and an employee which settles any claims an employee may have against the employer. The employment will end on an agreed date and the employer will make a severance payment in return for the employee signing the agreement to ensure that no claims are brought against the employer at an employment tribunal or civil courts. Put clearly your employment will end and you will receive a payment from your employer. (Occasionally settlement agreements are used when employment is continuing to settle an on-going dispute).
The settlement agreement must be in writing and the employee must take independent legal advice from an employment law specialist who is covered by indemnity insurance before the agreement is binding. This could be a solicitor, a trade union official or an advice centre worker.
There are several reasons why an employer may offer an employee a settlement agreement, some of which are set out below.
Redundancy – if your role is redundant and your employer is offering more than the statutory redundancy payment, it may offer a settlement agreement. If the employer is not offering any more than you are entitled to in any event, there is no good reason for you to enter into the agreement. If your employer tells you that your role is redundant when it is not, and they employee someone else to do your job, you would still have a claim against them even if you had signed a settlement agreement as they would be guilty of fraudulent misrepresentation.
Performance improvement process – an employer may offer a settlement agreement as an alternative to going through the performance improvement process. However, just because they begin the process does not mean that they are justified in doing so. This is where professional advice can be really helpful.
Breakdown of the implied term of trust and confidence – this can be for many reasons and an employer may offer the settlement as a way of bringing the employment to an end with certainty. It is often a way for both parties to walk away without tearing lumps out of each other.
To avoid a tribunal claim – if the employer knows or suspects that they would have no or little defence to specific claims you, the employee, is threatening to bring, then they may offer a settlement agreement as a way to avoid having to defend such claims.
Misconduct – if you are being taken through a disciplinary procedure for misconduct the employer may offer a settlement agreement as a direct alternative to starting or concluding that process.
Certainty – an employer may offer a settlement agreement simply as a way to be certain of how the employment will end and what restrictions, if any, they wish to place on the employee after the employment ends.
No. You have the right to reject a settlement agreement if you don’t think it is right for you, preserving your full employment rights including the right to bring claims against your employer. However, I would advise that if you are offered a settlement agreement you take specialist advice as soon as possible. Your advisor will be able to help you make the decision as to whether you should accept the agreement, either on the terms offered, revised terms, or at all.
Your solicitor, or other legal advisor, will take a history from you regarding the build up to the settlement agreement being offered, advise you on the merits of any claims you may have against your employer, or not, as the case may be, and advise you, undertaking any negotiation that is required on your behalf. Your solicitor can often be the “bad guy” allowing you to leave on reasonable terms, even though you are seeking a better settlement.
It is usual for the employer to make a contribution to the cost of taking advice from an employment law specialist. The contribution is usually between £300 and £500, more if the position is senior. In most cases this should be sufficient to cover the costs of the advice in full. If it does not your advisor should seek a further contribution from your employer.
Once both parties have signed the document it becomes a legally binding contract. However, either party can walk away before agreement is reached. An offer to settle is just an offer and is not binding until the document is signed. Similarly, you can explore the details of an offer and seek to negotiate a better deal with your advisor’s assistance and can still walk away if the deal is not satisfactory.
Agreed reference wording is often included in a settlement agreement, so that if your employer is asked for a reference in the future, they will give the one agreed and will not deviate from that. Sometimes the employer has a policy of only giving a factual reference, but you have a reference to show that you were employed by them for the relevant period of time.
This will depend on the circumstances surrounding the offer of a settlement agreement, the merits of any claims you may have against your employer, your employment package and notice period. Your solicitor will look at all these things before advising you whether the offer on the table is reasonable or not.
A protected conversation allows your employer to talk to you frankly about your employment and its possible termination without fear of using it against them going forward. However, if the employer behaves improperly or if discrimination is an issue the protection is likely to fall away. Tell your solicitor about any protected conversation your employer has had with you and they will advise you of the way forward.
The offer of a settlement agreement can often come out of the blue. Don’t panic and don’t agree to anything there and then. If you are hauled into a meeting without notice, try and make a note of what was said soon after you come out. Take advice a soon as possible and a good solicitor will support you from that time on, so you are not alone in this.
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