Settlement Agreements – what are an employer’s legal obligations?
During the employment lifecycle, one side or the other may begin to feel that the employment relationship has broken down and run its course. This situation can arise from a specific dispute, or the relationship may have deteriorated over time, to the point where it is difficult to imagine it ever recovering.
It is generally recognised that problems in the workplace are best resolved in open conversations – including as appropriate, through the use of performance management, informal and formal disciplinary or grievance procedures, workplace mediation, or Acas conciliation.
However, settlement agreements are a tool that can be used to deal with workplace problems and in particular, bringing an employment relationship to an end in a mutually agreed way. They are often used in situations where an employer and employee feel that their employment relationship is no longer working and a ‘clean break’ is the best way forward. In these situations, both parties can agree the basis for bringing the employment to an end.
Settlement agreements can also be used to reach an agreed and final conclusion to a workplace dispute or issue, which does not result in an end to the employment relationship. For example, a settlement agreement can be used to resolve a dispute over holiday pay.
What are settlement agreements?
Settlement agreements – formerly known as compromise agreements, are documents which set out the terms and conditions agreed by those involved (the two parties) when they agree to settle a potential employment tribunal claim, or claims, or other court proceedings.
The ‘settlement agreement’ replaces the previous ‘compromise agreement’ which assumed a pre-existing dispute. However, settlement agreements can be entered into on a ‘without prejudice’ basis, even where no employment dispute exists.
In this context, ‘without prejudice’ means that the existence of the discussions cannot be used as evidence in any claim for unfair dismissal. More comprehensive detail on the facts of this change can be seen in the Acas Code of Practice on Settlement Agreements and its booklet, Settlement Agreements: A Guide.
A key point to note is that so long as settlement negotiations are approached fairly, professionally and properly, employers can suggest settlements and negotiate with employees even where no other action has been undertaken.
Legal requirements involved in setting up a settlement agreement
For a settlement agreement to be valid in waiving an individual’s right to bring a complaint or complaints before an employment tribunal or other court, certain legal considerations must be met – including all of the following conditions:
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 advisor on the terms and effect of the proposed agreement and its effect on the employee’s ability to pursue that complaint or proceedings before an employment tribunal or other court – Note: there is usually a cost involved in obtaining such advice and employers can offer to pay any such fee – or a contribution towards it, in the interests of ensuring that the employee gets the necessary advice.
The independent advisor must have a current contract of insurance or professional indemnity insurance covering the risk of a claim by the employee in respect of loss arising from that advice
The agreement must identify the advisor
The agreement must state that the statutory provisions which set out the above conditions regulating the validity of the settlement agreement have been satisfied.
Who can be an independent advisor?
An independent advisor can be:
a qualified lawyer
a certified and authorised officer, official, employee or member of an independent trade union; or
a certified and authorised advice centre worker.
The advisor must not be employed by, acting for, or connected with the employer.
Confidentiality clauses in settlement agreements
It should be noted that confidentiality clauses are voluntary and are a matter for the parties to agree during the course of the settlement discussions.They should only be used when necessary and should not be included in settlement agreements as a matter of course.
Confidentiality clauses cannot and should not seek to prevent an individual from being able to make a protected disclosure of matters of public interest under ‘whistleblowing’ legislation (the Public Interest Disclosure Act 1998 (PIDA)). Any provision which attempts to do so will be legally unenforceable.
If a confidentiality clause is to be used, it should include wording to make it clear that the individual’s right to make a protected disclosure of matters in the public interest is not affected. The wording should not seek to discourage the individual from raising concerns, for example about wrongdoing, poor practice or unlawful conduct in the employer’s organisation.
Some advantages/disadvantages of using settlement agreements
They can provide a swift and dignified end to an employment relationship that is not working
They can avoid the time, cost and stress involved for both parties in a tribunal claim
They can provide compensation and often a reference for employees.
The cost of paying an agreed financial sum to an employee
The potential risk to the ongoing employment relationship with the individual if settlement is not agreed
The potential risk to employment relations in the wider workforce if used inappropriately or as a substitute for good management practices.
How do you discuss and negotiate settlement offers?
When approaching settlement discussions and negotiations, it’s best to consider the following factors:
the time you need
the process that works best
the people involved
the sensitivity of the issues being discussed
the payment arrangements
how to end the employment relationship.
Further detail relating to the above can be seen in the Acas guidance to settlement agreements.
How to make a settlement offer?
Employers can open settlement discussions and make an offer either orally or in writing. Speaking to the employee involved about the issues and the proposal of settlement is a helpful first step. Putting an offer in writing will help to prevent misunderstandings.
A written offer would usually outline the proposed terms of an agreement – for example, what the proposed compensation may be. Any final agreement must be put in writing.
However an offer is made, it is best to provide the employee with a clear indication of why the offer is being made. For example, where it is due to concerns about the employee’s poor performance or attendance. In explaining such reasons, it should be noted that settlement discussions do not form part of a disciplinary or performance management process.
The formal written agreement
Following any discussions and negotiations, if the parties wish to conclude a settlement agreement, they will need to draw up a formal written agreement.
Each settlement agreement will, of necessity, reflect the particular circumstances of its individual case.
Allowing reasonable time for an employee to consider an offer
The employee needs to be given reasonable time to consider an offer of a settlement agreement. What is reasonable will depend on the circumstances of each case, including what both parties might agree is a reasonable time. However, 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. In some circumstances, not allowing a reasonable time might mean that the settlement discussions can be referred to as evidence in a subsequent unfair dismissal claim before an employment tribunal.
Note: The period of ten calendar days is a specific requirement of the Acas Code of Practice on Settlement Agreements (under section 111A of the Employment Rights Act 1996) (see paragraphs 12 and 18 of the Code), the failure to adhere to which may affect the admissibility of pretermination settlement negotiations as evidence in unfair dismissal cases before an employment tribunal.
In view of the above, it is helpful to agree a timetable for discussions which allows parties time to take advice and to consider offers, whilst also avoiding any unnecessary delays.
Ending the employment relationship
Where the settlement agreement includes an agreement to end the employment relationship, the employment can be ended either with the required period of notice, or as agreed between the parties in the terms of the settlement agreement.
Entering into a settlement agreement which ends the employment relationship does not always mean that the employee has been, or will be, ‘dismissed’. The parties may have mutually consented to bring the contract of employment to an end for a reason other than dismissal – for example, that the employee has simply agreed to leave voluntarily on agreed terms.
In addition, there is no need for a settlement agreement to set out why the employment relationship is ending. However, if the parties wish to do so, then the settlement agreement may state that the employee is being, or will be, dismissed, if this reflects the underlying situation that has led to the settlement agreement.
It is worth bearing in mind during settlement discussions, that the specific circumstances and underlying reason for the ending of an employment contract may impact on an employee’s entitlement to Jobseekers Allowance, Universal Credit and payments under some insurance policies. Parties in any doubt should seek advice from Jobcentre Plus, or their insurance policy provider.
Key features of settlement agreements
They are legally binding
They can waive an individual’s rights to bring a claim covered by the agreement – for example, the right to make a claim to an employment tribunal or court
The employee (or former employee) usually receives some form of financial payment and will also often receive a reference as part of the agreed terms
They are entirely voluntary – they include terms and conditions that are mutually agreed, and parties do not have to enter into them if they do not wish to do so
They are often reached through a process of discussion and negotiation. The parties do not have to accept the terms initially offered – there may be a process of negotiation during which both sides make offers and counter offers
Negotiations about settlement agreements are often confidential in the sense that, if an agreement is not reached, the negotiations may not be admissible as evidence in claims before an employment tribunal or in other court proceedings.
Note: the information in this article is not intended to be exhaustive and the very nature of settlement negotiations are such that there are countless variables and issues that may arise, including those relating to: automatically unfair dismissal, unlawful discrimination and wrongful dismissal. Settlement agreements are legal documents and employers should seek professional advice and take into consideration the Acas guidelines before entering into such agreements with employees.
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