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Employment Settlement Agreements

Updated: Feb 16

The coronavirus pandemic has placed a tremendous strain on businesses across the UK, and part of that strain has fallen on relationships between employers and employees. When that strain becomes too much and the relationship sours or breaks down altogether, thoughts can turn to the best way for both parties to end things as amicably as possible.

One way for this to happen – and to avoid the prospect of legal action, including tribunal claims – is by the use of settlement agreements.

What are settlement agreements?

They are legally binding contracts which can be used to settle a dispute between an employer and an employer and are in particular used to end the employment relationship on agreed terms. Settlement agreements are voluntary. Parties do not have to agree them or enter into discussions about them if they do not wish to do so.

Settlement agreements can be proposed by both employers and employees, although they will normally be proposed by the employer. A settlement agreement proposal can be made at any stage of an employment relationship.

Settlement agreements are commonly made to settle a dispute to prevent a claim being made at the Employment Tribunal. The main feature of a settlement agreement is that they waive an individual’s right to make a claim to a court or Employment Tribunal on the matters that are specifically covered in the agreement.

For a settlement agreement to be legally binding the following conditions must be met:

  • 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, such as a lawyer or a certified and authorised member of a trade union

  • The independent advisor must have a current contract of insurance or professional indemnity covering the risk of a claim by the employee in respect of loss arising from the advice

  • The agreement must identify the advisor

  • The agreement must state that the applicable statutory conditions regulating the settlement agreement have been met.

The employer will typically pay for the employee to get independent legal advice on the agreement. The advice the adviser will give the employee is usually limited to the terms of the agreement, e.g. that the employee understands what they are agreeing to. The adviser will not normally advise the employee as to whether it is a good agreement or if they could have got a better result by going to a tribunal.

When negotiating a settlement agreement, parties may find it helpful to discuss proposals in person and any such meetings should be at an agreed time place to allow both parties time to prepare. Whilst it is not a legal requirement, employers should consider allowing employees to be accompanied to the meeting by a work colleague, trade union official or trade union representative as such discussions can be overwhelming and the employee may need some support.

Settlement agreements can include a variety of terms and conditions. They are encouraged as the agreement is decided by the parties, rather than being imposed by a Tribunal.

Outcomes that are not usually obtained at an Employment Tribunal can also be agreed, such as providing a reference or an apology.

Most settlement payments under £30,000 can be made tax-free, provided the payment is a form of compensation for the employment ending. Even where the parties have agreed that the settlement payment is not taxable, it is common for employers to ask for a ‘tax indemnity’ as part of the settlement agreement. This means that if the HMRC decide that any tax is due, the employee will be liable for it. The indemnity will usually state that employee must reimburse the employer for any tax that the HMRC claim from the employer.

Settlement agreements can also include terms in relation to:

  • termination

  • compensation

  • notice payments

  • bonus payments

  • pensions

  • insurance

Contractual payments, such as notice pay and holiday pay, are subject to tax and National Insurance deductions.

Where a proposed settlement agreement based on the termination of the employment is accepted, the employee’s employment can be terminated either with the required contractual notice or from the date specified in the agreement. The details of any payments due to the employee and their timing should be included in the agreement.

Parties should be given a reasonable period of time to consider the proposed agreement. In practice, a minimum period of 10 days is recommended, unless the parties agree otherwise. This time period enables both parties to consider the proposed formal written terms and to receive independent advice.

If a settlement agreement is reached and agreed, then any claim that has already been made at the Employment Tribunal will have to be withdrawn. The claim will then be dismissed and come to an end.

If a settlement agreement is rejected and the parties still wish to resolve the dispute then some other form of resolution should be sought, whether this is through arbitration or through the Employment Tribunal.

Where the matter is progressed to an Employment Tribunal, section 111A of the Employment Rights Act 1996 provides that offers to end the employment relationship under a settlement agreement can be made on a confidential basis, which means that they cannot be used as evidence in an unfair dismissal claim to an Employment Tribunal.

Claims that relate to an automatically unfair reason for dismissal such as whistleblowing, union membership or asserting a statutory right are not covered by the confidentiality provisions set out in section 111A of the Employment Rights Act 1996. Claims made on grounds other than unfair dismissal, such as claims of discrimination, harassment, victimisation or other behaviour prohibited by the Equality Act 2010, or claims relating to breach of contract or wrongful dismissal, are also not covered.

Written by

Lisa Gray, HR Advisor at rradar

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