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Frequently Asked Questions
An employment settlement agreement is a contract between an employer and an employee that is legally-binding. Under these types of agreements the employee generally agrees to receive some benefit (normally a sum of money, although this can include non-financial benefits as well) and, in return, they agree to not sue their employer (whether in the Employment Tribunal and/or in the civil courts). This is why such an agreement is called a “settlement agreement”: under the agreement the employee is agree to “settle” their right to bring claims against their (former) employer (this could include, for example, a claim for unfair dismissal, discrimination, harassment or victimisation).
We refer to these settlement agreements as “employment settlement agreements” in order to distinguish them from other types of settlement agreements that you might receive in other areas of law (for example, a divorce settlement agreement).
In order for an employment settlement agreement to be valid and enforceable it must must satisfy certain conditions (which are set out in s.203(3) of the Employment Rights Act 1996).
The legal requirements of a settlement agreement are as follows:
- The settlement agreement must be in writing;
- The agreement must relate to a “particular complaint” or “particular proceedings” (i.e. to defined claims that you are settling under the settlement agreement);
- You must have received legal advice from a relevant independent adviser (such as a specialist settlement agreement solicitor) on the terms and effect of the proposed agreement and its effect on your ability to pursue any rights before an Employment Tribunal;
- The legal adviser that you instruct must have a current contract of insurance, or professional indemnity insurance, covering the risk of a claim by you against your legal adviser in respect of legal advice given;
- The settlement agreement must identify the adviser; and
- The settlement agreement must stated that the conditions regulating compromise agreement/settlement agreements have been satisfied
If your agreement does not meet the above criteria then it will not settle your statutory claims – this would mean that you would technically be able to pursue your (former) employer for your statutory rights. However, the practical effect of doing so will probably be that you will have to pay back some or all of the payments made to you under the settlement agreement).
You may wish to seek a settlement agreement in a variety of circumstances, generally either when you want to leave your employment because you are unhappy, because your employer wants to terminate your employment, or where you have already left your employment and want to settle various claims you may have against your employer.
The following types of situations are circumstances which could lead to a settlement agreement:
- If your employer has failed to pay you wages that you are due
- If your employer has breached your contract of employment in some way (e.g. by failing to pay you a bonus or commission that you believe that you are due)
- If you have been discriminated against at your job or harassed
- If you have been victimised by your employer because you have raised a complaint
- If your employer thinks that you are underperforming
- If your employer thinks that you may have engaged in misconduct
Senior employees in organisations (such as executives or directors) may find that a restructure, merger or a change in strategy may lead to a situation where their continued employment is difficult. A natural solution to such an issue is for the senior employee and the employer to agree mutual termination terms, which can be arranged via an employment settlement agreement.
The main advantages of an employment settlement agreement are as follows:
- You can use them to obtain a financial sum to compensate you for poor treatment that you have experienced at work (for example, if you have been discriminated against or have had your contract breached) without both sides having to go to the cost, stress, time and uncertainty of an Employment Tribunal claim
- Settlement agreements are quite tax-efficient, in that you can receive the first £30,000 of the settlement amount tax-free
- You can negotiate into the settlement agreement non-financial terms that are important to you (such as, for example, a reference that you are happy with, an internal or external announcement, or appropriate confidentiality clauses)
- You can use a settlement agreement to negotiate a higher sum upon termination of your employment than you may have otherwise been entitled to receive (i.e. beyond your notice pay, holiday pay, and statutory redundancy pay (if applicable))
- To allow unhappy employees an exit from potentially stressful and unpleasant situations without having to resort to litigation
The main disadvantages of a settlement agreement are as follows:
- Your employer may not be willing to pay you what you think your claims are worth under the settlement agreement – in this case, you will need to decide to accept (what you consider to be) an undervalue or to reject the settlement agreement
- You may not be happy with the broad confidentiality clauses that tend to be used in settlement agreements
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