A Settlement Agreement is a written Agreement between an employer and employee within which the employee agrees to give up their employment rights in return for a sum of money from the employer.
The law states that an employee cannot legitimately give up their employment rights unless the terms of the Agreement are contained in a Settlement Agreement or a COT Agreement which is dealt with by an ACAS officer.
The reason for this restriction is to prevent employer’s taking advantage of employees by offering them money to sign away their rights. Because a Settlement Agreement has to been in a certain format, contain certain terms and legal advice must be obtained on the content, there is protection for employees and employers can be sure that they will not have to defend a claim in the Employment Tribunal.
Settlement Agreements are becoming an increasingly popular method of ending employment relationships and more employers are using them to avoid messy, time consuming and expensive disputes.
Many employers want to have the certainty to know that once the employment relationship ends there is no further dispute to deal with. Employers are also being more proactive to try to avoid disputes and are offering an Agreement at an early stage.
An example of where Settlement Agreements are used frequently is with redundancies. Many employers are identifying those employees who are at most risk of redundancy and rather than going through a procedure they are going straight to the employee with a Settlement Agreement. Usually the amount of ‘compensation’ on offer under the Settlement Agreement is higher than the legal minimum redundancy pay, and so it becomes an offer that is attractive to an employee.
In this situation an employee has two option, either take the Settlement Agreement with more money or go through a redundancy procedure and potentially receive the legal minimum payment.
In most cases a Settlement Agreement will mean that the employee agrees to give up all of their employment rights (although there are a couple of exceptions which are set out below) and the employment will end.
It is possible to sign a Settlement Agreement that only gives up some employment rights, for example, a claim for unpaid wages where an agreement is reached to accept a lump sum rather than go through the Employment Tribunal. The employer may ask an employee to sign an Agreement that they will not bring a claim for the outstanding money.
Usually however, once you reach the point of a Settlement Agreement it means that all claims will be compromised and employment ceases.
From the 29th July 2013 the law changed to re-name Compromise Agreement’s as Settlement Agreements.