Settlement Agreements – What are they and how are they used?

Settlement agreements – What are they and how are they used?

Gill Wooldridge takes at look at the use of Settlement Agreements in the termination of an employee’s contract of employment.  If you are an employer or an employee and we can help with issues relating to this note or on any other employment related matter, please contact gill@bradleyhayneslaw.co.uk or call us on 01905 900 919. 

Settlement agreements are generally used by employers or employees to legally bring an employment contract to an end, on agreed terms.  Although they can also be used to settle other employment disputes such as holiday pay claims.

As a general point, a contract of employment exists until it is brought to an end by either the employer or employee.  Commonly, an employee will give the required notice ending their employment before moving onto other opportunities and employers may use redundancy or disciplinary procedures to terminate the employment contract as the situation requires.

There may be occasions when the employer wishes to end the employment contract in the knowledge that the employee would not be able to bring a claim at industrial tribunal or conversely, an employee may wish to negotiate terms to end their employment and would agree not to bring a subsequent claim.  A settlement agreement legally records that agreement.

1. What is a Settlement Agreement?

A settlement agreement, previously known as a compromise agreement, is a legally binding agreement between employer and employee terminating the employment contract and recording the terms on which the employment contract is ended.

2. When might a settlement agreement be needed?

A settlement agreement is used when one party wants to terminate the employment contract without invoking the full terms of the employment contract or wider employment laws.  Typically, this arises when the relationship between employer and employee has broken down and the parties agree the contract of employment should end.  This breakdown could, for example, arise from poor performance of the employee or in a redundancy situation.  Alternatively, an employee may have cause to complain about the employer’s conduct and the issues can’t be resolved through a grievance procedure.

3. What are the benefits of a Settlement agreement?

A settlement agreement provides the parties with certainty as to the terms on which the employment contract is terminated.  It does so by setting out clearly the rights and obligations on termination.  Should either party breach the terms agreed then the injured party can take court action to enforce their rights.  This is to be contrasted with the uncertainty, time and expense associated with resolving disputes through the courts and tribunal systems.

Settlement agreements also have the benefit of incorporating commercial terms into the agreement, such as restrictive covenants and protecting sensitive information; a court or tribunal may not have the power to incorporate such terms in any judgment.  Equally, employees can benefit from knowing the financial settlement they will receive and the contents of their reference.

4. What features are typically included in a settlement agreement?

To enter into a settlement agreement is entirely voluntary and the terms of the agreement are a matter of negotiation. Typically, a settlement agreement includes the termination date, the financial terms of settlement, an agreed reference, commercial requirements such as confidentiality and restrictive covenant protections and statements as to the claims and complaints being settled.

5. What legal requirements are necessary for a settlement agreement?

In addition to the usual requirements of forming a legally binding contract, an employee should receive independent legal advice from a professional qualified to give such advice.  Solicitors are qualified to advise employees on settlement agreements.  The legal advisor’s role is to give advice to the employee on the effects of the settlement agreement.  This independent advice ensures that the employee is properly informed when signing the agreement and, as a consequence, provides the employer with the reassurance that the employee will be unable to resurrect the settled issues on the basis they did not understand what they were signing.  The solicitor advising the employee is expected to provide the employer with a certificate confirming the employee has received advice.

6. How can we help?

At Bradley Haynes Law we are experienced in supporting clients with any employee disputes or difficult HR matters.  We can provide you with legal and commercial advice in addressing employee issues and, if required, negotiating and settling termination of the employment contract.

We also provide employment advice to employees who may wish to settle a dispute or claim through a settlement agreement and can provide legal advice on the terms of the settlement and their ability to make a claim to tribunal.

If we can help with issues relating to this note or on any other employment related matter, please contact gill@bradleyhayneslaw.co.uk or call us on 01905 900 919.