What You Need To Know About Employment Settlement Agreements

Depending on the context, an employment settlement agreement may or may not result in termination. While most workplace problems can be resolved by proactively discussing the matter with the employee, this is not always the case. Knowing when and how to use an employment settlement agreement to resolve matters such as poor employee performance or breach of contract by the employer can save considerable time and reduce the chance of a future claim. In this article, we discuss what is meant by a settlement agreement, who can enter into such an arrangement, and when it might be appropriate to do so.

What Is An Employment Settlement Agreement?

A settlement agreement, previously referred to as a “compromise agreement”, is an arrangement between an employer and an employee (or former employee) to compromise on an employee’s contractual and statutory claims in the context of a specific workplace dispute or problem. It essentially waives an individual’s rights to bring a claim (e.g. for wrongful dismissal or breach of contract by the employer). There are two forms of settlement agreement; a settlement agreement leading to termination and a settlement agreement that does not lead to termination.

The agreement sets out the precise terms and conditions agreed to by both parties in order to settle a potential claim or court proceeding.

What Is Contained Within A Settlement Agreement?

There is no one standard form of a settlement agreement, and it will depend on the circumstances of the workplace problem and the agreement reached as to what should be included. In general, most settlement agreements will contain details of:

• The termination date and payment (if the employee is being terminated)
• Details of the claim that is being settled (e.g. wrongful dismissal, unfair dismissal, or in relation to a request for flexible working).
• Details of the compensation to be paid
• A waiver of liability by the employer explaining that the amount being offered is a full and final settlement
• Confidentiality or other restrictions
• Details of the statutory redundancy payment

It is important to understand that settlement agreements are legally binding on both parties, are entered into voluntarily, and are reached by a process of discussion and negotiation.

Calculating A Settlement Amount

When it comes to deciding how much compensation to pay, you should take into account a number of factors, including:

• The provisions in the employment contract relating to pay, notice periods and untaken annual leave
• The duration of employment
• How long it may take to resolve the matter if a settlement agreement cannot be not reached
• How easy it will be to replace the employee
• Why a settlement is being offered
• The cost of any future employment tribunal or court claims against the employer if an agreement cannot be reached.

Who Can Enter Into A Settlement Agreement?

Employment settlement agreements are mainly entered into between employers and employees (or ex-employees). In some cases, they can also be used between employers and prospective employees, e.g. job applicants who have a case for discrimination relating to how their application or interview was handled.

When Is It Appropriate To Use A Settlement Agreement?

Where possible, a settlement agreement should be entered into where legal action is yet to be taken. Settlement agreements are commonly used where the relationship between employee and employer has broken down. They can be used to achieve a “clean break” between employer and employee, leading to termination of employment. Alternatively, they can be used to bring an end to a workplace issue or dispute while allowing employment to continue.

Settlement agreements may be used in a wide range of scenarios, including where:

• There is a clash of personalities between an employee and another team member
• A member of staff is struggling to adapt to their role due to changes made by the employer
• A worker’s performance is below the required standard, and there is a preference on both sides not to go through a lengthy capability process
• An employee or former employee has a potential claim – e.g. unfair dismissal or wrongful dismissal
• A prospective employee has a claim for discrimination

It is important to note that a settlement agreement cannot be considered for certain types of claims, including those under TUPE, the Agency Workers Regulations 2010, and the Trade Union and Labour Relations (Consolidation) Act 1992. It is also not possible to contract out of the right to pay/receive statutory entitlements, including:

• statutory adoption pay
• statutory maternity pay
• statutory parental bereavement pay
• statutory paternity pay
• statutory shared parental pay, and
• statutory sick pay

Final Words

Employment settlement agreements can be extremely beneficial where there is an ongoing dispute, workplace problem, or potential claim, not least the ability to bring the matter to a conclusion in a mutually agreeable way. If you are considering entering into an employment settlement agreement, either as an employee (current, previous, or prospective) or employer, it is important to weigh up all of the options available before proceeding.

The employment law team at Pearcelegal has the experience and legal expertise to advise and represent you regarding a settlement agreement. To make an appointment, please contact us on 0121 270 2700 or enquire through our contact form.