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Settlement Agreements – 10 things you need to know

Being called in to have an ‘off the record’ discussion about your employment may come out of the blue. Equally, it may be a relief if you have suspected ‘something’ has been on the cards for a while. A settlement agreement might be raised with you during the processing of a disciplinary matter, during a redundancy situation, or if you have made a formal complaint, or grievance, against your employer. There are many reasons why an employer might choose to open discussions with you – and equally, why you might attempt to do so. In this blog, we highlight 10 things you need to know about settlement agreements.

Settlement agreement is the ‘new’ name for compromise agreement

Settlement agreements used to be known as ‘compromise agreements’. The name changed in 2013, the purpose of the change being to better reflect what the agreement is. Essentially, a settlement agreement is a means of an employee agreeing not to bring an employment law claim in return for something – usually financial compensation, although there may be other benefits in addition to this – from the employer.

Not just for dismissals

A settlement agreement doesn’t necessarily mean that your employment will come to an end. It may be that you have raised a grievance about your employment that your employer recognises is valid, but is keen to keep confidential. Alternatively, your employer may wish to change a term of your employment in a way that could otherwise be a breach of contract. They may offer compensation to you under a settlement agreement to try and achieve this.

More flexibility than a tribunal decision

Whether the discussions have come as a surprise to you, or are something you have anticipated, there are advantages to negotiating a settlement agreement which might not be achieved through an employment tribunal claim – for example you may obtain an agreed reference or an apology from your employer which the tribunal could not order.

Legal advice is essential

For a settlement agreement to be valid, you must have taken ‘independent legal advice’ from a ‘relevant independent adviser’. Your adviser can be a solicitor or barrister, or a trade union official or a worker in an advice centre such as a Citizens’ Advice Bureau, if they have been certified by the trade union or advice centre as competent to give the advice. In every case, the adviser has to have insurance covering any claim arising from the advice given to the employee. Your employer may well offer to pay for you to receive this legal advice, to ensure that this aspect of the requirements for a valid settlement agreement is met.

Claims you don’t know about can’t be covered

Your employer may ask you to sign a settlement agreement ‘in full and final settlement’. However, if a claim could not have been known about at the time, a blanket exclusion is very unlikely to work. In this way, former employees of the discredited BCCI were able to claim “stigma” damages in relation to the disadvantage they say they suffered on the labour market following the bank’s collapse. They had signed agreements relating to the termination of their employment, before the collapse of BCCI, which were stated to be in full and final settlement of all claims. The House of Lords held that neither employer nor employer could reasonably have expected the possibility of such a claim for stigma damages at the time. As a result, the claim for stigma damages was not covered by the agreement.

Discussions will be confidential

If the settlement is being discussed in the context of ongoing employment tribunal proceedings or a dispute between the parties, any negotiations will be ‘without prejudice’, and cannot be referred to before the Tribunal. However, if the discussions are not in the context of proceedings or a dispute between the parties, it used to be the case that they would not automatically confidential. Since 2013, section 111A Employment Rights Act 1996 allows these discussions to be kept confidential for the purposes of an unfair dismissal claim, even if there are no existing proceedings or dispute between employer and employee However, the confidentiality provided for by section 111A does not apply to claims to have been dismissed for an automatically unfair reason – such as dismissal related to maternity – to discrimination claims or breach of contract claims.

Settlement agreements are voluntary

You may be very happy with the offer of a settlement agreement. You will still need to take legal advice before signing, but there is nothing otherwise preventing you from signing up to the settlement agreement on offer. Equally, there is no obligation on you to agree to what’s being offered. As the ACAS code of conduct on settlement agreements makes clear, settlement agreements are voluntary. You can enter into a process of negotiation to obtain a settlement that you are happy with, or simply refuse to have any discussion. The agreement will be ‘subject to contract’ which means it is not binding on either employer or employee until it is signed.

Advantages of a settlement agreement

While you may initially be unwilling to sign a settlement agreement, there can be advantages of doing so. Employment Tribunal proceedings can be expensive, lengthy and incredibly stressful. It may be that a realistic settlement agreement represents a good outcome, taking these other factors into account. It will also bring a degree of closure to what may well have been a difficult period of your life.

Payments under settlement agreements can be tax free

The first £30,000 of a payment in respect of the termination of your employment can be free of tax and National Insurance. However if you receive contractual payments – for example bonus payments -, these will be taxable.

Reason for termination

Although not a requirement, you may want to include the ‘reason for termination’ in the settlement agreement. This can be important if you have income protection insurance which will only pay out in specific circumstances. Some policies specify that the reason for termination must be redundancy in order for payments to be made, so it may be important to include this in the agreement. We specialise in advising employees on settlement agreements covering all types of employment disputes. Should you be looking for advice in connection with a settlement agreement, we would be delighted to assist – call us on 0333 331 4311 or complete the contact form on our website.