Settlement Agreements in Employment: What UK Employers and Employees Need to Know

What is a Settlement Agreement?

A Settlement Agreement, previously known as compromise agreement, is a legally binding, written contract between the employer and employee that settles an employment dispute or a potential employment tribunal claim, often involving a monetary payment to the employee in exchange for agreeing to waive any claims they may have against the employer.

The Settlement Agreement is voluntary, it includes terms and conditions that are mutually agreed, and parties do not have to accept them if they do not wish to. 

If an employee declines a settlement agreement, their employment may continue as normal, or the employer may, depending on the circumstances of the offer, take steps to terminate their employment, by way of disciplinary action or following a formal redundancy process, and an employee’s normal employment rights would apply. 

Consideration Period

According to ACAS, a reasonable time frame for the employee to consider the Settlement Agreement offer is 10 days after the employee has received a copy of the agreement.

Whilst this is the recommended timescale it is not set out by law and therefore an employer could give less time to consider.

If an employer gives a short timescale or is unreasonable in giving the employee time to consider the offer then it could leave them open to a claim by the employee that they behaved improperly, and if the Tribunal agree, the fact of the offer and any associated correspondence or conversations could potentially be used in evidence in a subsequent Employment Tribunal claim.

What details will be included in the Settlement Agreement?

• Leaving Date – if applicable to the circumstances it will specify when the employment will end.
• Wages and Benefits – outlines any outstanding wages, bonuses and other benefits that may be owed up to the termination date.
• Notice Pay – the Agreement should address whether the employee will be required to work their notice or will receive a payment in lieu of notice if the employee is not required to work their notice period.
• Holiday Pay – will detail any accrued holiday or may deduct excess holiday which may have been taken prior to the termination date.
• Termination Payment/Compensation Payment/Ex-Gratia Payment- details the amount of compensation to be paid to the employee which is often tax free up to £30,000.
• Statutory Redundancy Payment – if applicable, the agreement, should also cover any Statutory Redundancy Payment.
• Tax Indemnity – this is where the employee agrees to be responsible for any tax liabilities that arise from the termination payment.

Other Terms included in the Settlement Agreement

1. Waiver of claims

This clause in the agreement states that the employee agrees to give up any legal claims they may have against the employer which relates to their employment or the termination of their employment.

The clause will list specific claims to be waived such as breach of contract, discrimination or unfair dismissal. 

However, some claims will be excluded from the waiver such as accrued pension rights. if pension contributions have not been paid correctly and this is discovered later on then the employee would be able to pursue this as a separate issue. 

Also claims for latent personal injury, if the individual is not aware at the date of signing, relating to a health condition that could be attributed to their employment, an example being hearing loss. 

In addition, there is normally an exemption to allow the employee to enforce the terms of the Settlement Agreement, so if the employer fails to pay them as agreed they can make a breach of contract claim in regard to this.

2.Confidentiality

A confidentiality clause is normally included to protect the terms of the agreement and the reasons for the termination.

There may be clauses where the parties agree not to disclose details to third parties (with limited exceptions such as close family members of professional advisers or where they are required to by law) and they also agree to keep the agreement itself confidential. 

3. Restrictive Covenants or Post-Termination Restrictions

There are varying types of restrictive covenant that could be included in the Settlement Agreement depending on what the employer wishes to prevent an employee from doing, this includes:

• Non-compete clauses – After the employee’s termination date this clause restricts an employee from joining a competitor. It may also stipulate the employee is unable to work within a certain radius of where their former employer is based.
• Non-solicitation and non-dealing clauses – This prevents the employee from enticing the employers’ customers or suppliers away after they have left. This should be limited to customers/suppliers that they were in direct contact with during their employment.
• Non-poaching clauses – This prevents the employee from approaching other employees to try and persuade them to leave their jobs.
• Confidentiality clauses – This clause makes it unlawful for the employee to discuss sensitive information about their former employer or their clients.

4. Non-Derogatory Clauses

These prevent either party from making negative comments about the other to any other persons such as on social media.

5. Assistance with Investigations

In some cases, the employer may require an employee to agree to cooperate with investigations or legal claims should the need arise in the future.

6. Breach of Terms

If the employee breaches the terms of the Settlement Agreement the employer could demand repayment of the money the employee has received.

Points to Consider

A settlement agreement is a powerful tool for resolving employment disputes, but it should be used carefully and should not be used as a substitute for good management practices, which could pose a risk to employment relations in the wider workforce. Good workplace relations are promoted by rules and procedures for handling performance management, disciplinary and grievance situations that convey fairness and transparency to the employees.  

A Settlement Agreement can be offered at any stage of an employment relationship and there is no legal requirement to go through a disciplinary process before offering one, but it is advisable to try and resolve the issue with the employee by talking to them and working with them to try to resolve the issue that is causing the difficulty.

A Settlement Agreement can provide a swift and dignified end to an employment relationship that has broken down and can avoid the costs and stress of a lengthy tribunal claim. If, however, the settlement process fails this could pose a potential risk to the ongoing relationship with the employee and could give rise to a claim in the Employment Tribunal.