Once a departure has been agreed, the aim of a settlement agreement is to give the employer confidence that the employee cannot bring any legal claims against them in the future. The benefit to the employee is that this will usually be accompanied by a reasonable sum of money.

So, what do settlement agreements do, and what form do they take?

What do settlement agreements do?

Settlement agreements are used to stop employees from bringing any number of legal claims against their employer.

There are certain employment law claims which employees can only waive if an agreement in the right format is entered into. Essentially, these are either agreements negotiated with ACAS (COT3 agreements), or ‘settlement agreements’, which need to meet the requirements listed below.

Most employment law claims can only be settled in this way, for example unfair dismissal, discrimination, etc. Some employment law claims are treated as so sacred that they cannot even be waived in a settlement agreement. Claims that cannot be waived include some collective consultation failures (where there is a TUPE transfer or collective redundancy) some claims under the Agency Workers Regulation 2010 (although these can be settled through a COP3 agreement), claims under the Trade Union blacklists regulations, and claims for statutory maternity, paternity or adoption pay.

Settlement agreements can be used to cover a wide variety of other claims, which are not specifically employment law related, such as breach of contract (this would cover notice pay etc.) and personal injury claims.

What do settlement agreements look like?

Firstly, the settlement agreement must comply with the statutory rules which stipulate that they must:

  • be in writing
  • relate to particular complaints or particular proceedings (this means specifying the particular claims that are being waived; it is not good practice to simply list every claim, and the agreement would be of no use if it simply referred to “all employment claims”)
  • the employee must have received legal advice about the terms and effect of the settlement agreement from a ‘relevant independent adviser’ (qualified lawyers, certified Trade Union or voluntary sector officers, or other advisers specified in legislation)
  • the agreement must identify the adviser, and the adviser must have insurance cover for faulty advice
  • the agreement must state that the conditions set out above have been met

In addition the agreement must be in return for a payment (a contract is only binding if there is “valuable consideration”).

A well-drafted settlement agreement will also deal with the following (and so can be very long):

  • Group companies: if there is a group of companies, the employer will want the settlement to cover all members of the group, and all the people who work in them.
  • Details of claims being waived: the employment law complaints that are being settled, or waived, should be carefully considered, and individually specified. In addition to a narrow list of employment law claims being settled, the agreement should have a general, catch-all waiver, which can cover the non-employment law claims, and be in place just in case any employment law claims have been missed out or cannot be settled. This will usually mean including a long list of all possible employment law claims and other claims in the settlement agreement.
  • Employee warranties: where it is not strictly possible to settle an employment law claim, the agreement should require the employee to make a ‘warranty’ that they will not bring such a claim, and do not have such a claim, giving the employer a breach of contract claim against the employee if they subsequently raise an issue along these lines.
  • Financial claw-back: the settlement agreement will usually claw-back money paid to the employee should they bring any subsequent claims. It is important for the employer to avoid the claw-back being a ‘penalty clause’ as this would not be enforceable. The amount being recovered must accurately reflect losses.
  • Fair payment: employees will want to check that the settlement agreement provides good value for money in light of the claims they might have and the compensation these might attract. They may well want to negotiate the amount of the payment up. Employees should make sure that all their benefits are taken into account.
  • Legal fees: other than in exceptional circumstances, the employer will cover the reasonable costs of the relevant independent adviser. The employees will usually want the contribution negotiated up to cover any additional legal costs they are put to.
  • Tax: settlement payments of up to £30,000 are usually tax-free, but the tax implications of any payments need to be carefully considered, particularly where a payment in lieu of notice is being made, as this could well be taxable.
  • Confidentiality: both parties may want the terms of the agreement to stay confidential. The employer may well want to go beyond this, and ‘gag’ the employee from saying anything about the end of the employment or that might put them in a bad light. An employee will usually want to resist this, and should be careful that these obligations do not get in the way of what they need to say in a future job hunt.
  • References: the terms of a reference are usually a very important part of a settlement agreement negotiation, and these can be dealt with in the agreement. The employer needs to be given a degree of leeway to change references, however, depending on the questions that are asked, and future information that may come to light. Employers need to remember that they have an obligation to future employers not to be negligently negative.
  • Personal injury and pension rights: employees need to make sure that their ability to bring these claims are unaffected by the settlement agreement.

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