What is it
A settlement agreement is an agreement between an employee and their employer that is legally binding. It normally results in a severance payment being made by the employer in return of the employee not pursuing any claims in a court or tribunal. This agreement is therefore typically used as a convenient way for employers to break off their contract term with their employee on mutual terms without the need to go to court or a tribunal over further disagreements. A settlement agreement can also be reached by the employer and a third party who is also able to bring a claim to the employment tribunal such as an unsuccessful job applicant that claims they were discriminated against at the job interview.
The usual payments offered through a settlement agreement can be:
- Compensation for loss of office
- Notice payment
- Bonus and commission
- Pension
- Medical and life insurance
- Contractual payments up until the termination of employment
- Additional sums as consideration for new clauses of confidentiality and/or post-termination restrictions
Benefits to using a settlement agreement
- The main advantage of the agreement is that the employee can leave their employer on favourable terms as they will normally be offered a suitable payment with bonuses such as a reference and other non-financial payments that could be included or negotiated, in order to leave with full security and ultimately a clean break.
- It can be offered at any point of employment. This means that if a new employee finds themselves in a position that they are unable to adapt or sufficiently motivate themselves to succeed in, they can opt in for a settlement agreement in order to leave with a satisfactory amount of payment and other benefits such as a reference for their new job from the employer, provided the employer offers a settlement agreement in the first place, as they may wish to explore other options first such as further discussions between the two parties or performance management.
- It can noticeably avoid the time, stress and cost for the two parties if the two parties were to pursue a court or tribunal claim, as settlement agreements will need to be looked over by the employee’s solicitors prior to agreement or further negotiation. If its terms and payment look satisfactory upon examination then the left-over process can be dealt with fairly quickly and simply by both of the parties, with a solicitor certifying the agreement at the end.
- Any unfavourable terms can be negotiated before the agreement is made, and once it is done the agreement is legally binding, meaning that any terms agreed by the employer and employee will not be broken without legal consequences. This is why a settlement agreement is not limited to an employee’s termination of contract, but can also be used as a way to resolve ongoing grievances between the employer and employee within the workplace.
- Neither party is forced to accept the terms of agreement as there is no obligation to do so. Meaning that if negotiations over the agreement fail, there will be no legal obligations for either the employer or employee as nothing has become binding, and both parties will be free to try different means of resolving the dispute.
Validity of agreement
In order for the statutory agreement to be properly certified and become legally binding it will need to meet the following statutory requirements as per section 203(3) of the Employment Rights Act 1996:
- The agreement must be in writing.
- The agreement must relate to a “particular complaint” or “particular proceedings”
- The employee must have received legal advice from a relevant independent adviser on the terms and effect of the proposed agreement and its effect on the employee’s ability to pursue any rights before an employment tribunal.
- The independent adviser must have a current contract of insurance, or professional indemnity insurance, covering the risk of a claim against them by the employee in respect of the advice.
- The agreement must identify the adviser.
- The agreement must state that the conditions regulating settlement agreements under the relevant statutory provisions have been satisfied.
