On 29 July 2013, Section 23 of the Enterprise and Regulatory Reform Act 2013 renamed compromise agreements and compromise contracts as settlement agreements in all relevant pieces of UK legislation.
A settlement agreement, in employment law, is a legally binding document between an employee (former or present) and an employer (former or present). They are used to approve terms of termination of employment where an employee receives a financial payment in return for the waiver of all genuine and potential statutory claims against the employer.
Prior to the Enterprise and Regulatory Reform Act 2013 they were referred to as compromise agreements.
The change of name has caused concern as to whether agreements will still be binding if they were referred to as “compromise agreements” rather than “settlement agreements” after 29 July 2013. There is, as of yet, no decided case on the point but many commentators believe such agreements will be effective in settling employment claims provided they recite the necessary statutory provisions and state that they have been complied with irrespective of whether or not they use the term “compromise agreement” or “settlement agreement”.
Under the Employment Rights Act 1996 for a waiver of statutory employment rights to be effective and enforceable all of the following conditions must be met:
- The agreement must be in writing
- The agreement must relate to particular claims. It would not be sufficient to simply state the agreement is in ‘full and final settlement of all claims’. It has to specifically name all claims that it intends to cover
- The employee must have received advice from an independent adviser on the terms and effect of the agreement and effect on the ability to pursue any claims before an employment tribunal or other courts. An independent adviser can be a qualified solicitor, certified officer, a member of an independent trade union or an authorised advice centre worker. The adviser cannot be employed by, connected with or acting for the employer
- The independent adviser must have a professional indemnity insurance covering the risk of a claim by the employee in respect of loss arising from that advice
- The agreement must clearly identify the adviser
- The agreement must state that the statutory provisions which set out the above conditions regulating the validity of the settlement agreement have been satisfied
Naturally, terms and conditions of a settlement agreement are tailored to case specific circumstances but there are certain common clauses that feature in most of them. These would include:
- Background (outlining summary of circumstances, including employment details like position, start date or even reasons for termination)
- Parties to the agreement
- Definitions (explaining terms used in the agreement)
- Garden leave/Payment in Lieu of Notice/Accrued Holiday entitlement
- Termination payment (an amount being paid to the employee by way of compensation for loss of employment)
- References (it is common to include a clause to confirm that the employer will respond to all requests for a reference in previously agreed form)
- Tax liabilities
- Repayment on breach (which would state that an employee would have to repay the money if he/she breaches any term of the agreement)
- Restrictive covenants (post-termination restrictions to protect the employer’s business)
- Employee’s warranty (the employer could withhold the payment if he discovers employee’s misconduct would have justified dismissing him without notice)
- Legal fees (an employer often makes a contribution towards the employee’s legal fees but it is not a legal requirement)
- Waiver of claims (the crucial clause of the agreement where the employee gives up his rights to bring a claim against the employer following the termination of employment)
- Jurisdiction (confirming which country’s courts are to hear potential disputes)
- Advisor’s certificate (which is signed by the employee’s legal advisor to confirm that the advice has been given)
Although the above clauses are not exhaustive, they are the most commonly used clauses integrated into the agreements. It is however crucial for the employee to consult on the contents of the agreement with a solicitor or qualified advisor who can not only provide them with guidance in relation to the contents of the agreement but can often negotiate better terms of their departure.
Breaches of the settlement agreements’ terms and, consequently loss that a breach may cause, can result in legal action in Civil Courts just like it would in any other breach of contract case.
If you require further advice on settlement agreements or any other employment law issue, please do not hesitate to contact Alan Lewis of our Employment Department on 0161 837 6807, or email us on firstname.lastname@example.orgFind out more about our Employment department Settlement Agreements – Frequently Asked Questions