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Top Ten Facts about Settlement Agreements for Employers and Employees

Settlement agreements are legally binding contracts between an employer and an employee which can be used to resolve an ongoing workplace dispute, or to end an employment relationship on agreed terms. Effectively, it is an agreement to settle claims!

Either an employer or an employee can suggest resolving matters with a settlement agreement, and in our experience settlement agreements often form a better way to resolve matters than a contested Employment Tribunal dispute.

However, settlement agreements can still confuse an employee or employer when suggested for the first time, so we’ve set out our Top Ten facts for some basic information on what these agreements are and what they mean.


1. Settlement agreements used to be known as “compromise agreements”

Settlement agreements came into effect on 29 July 2013. Before that, a very similar method of resolving disputes called compromise agreements were available. Some employees or employers may still refer to the old-style compromise agreement when trying to negotiate a settlement, and if you ring up asking for help with a compromise agreement we will still be able to support you!

If someone has suggested a compromise agreement to you, it will take the legal form of a settlement agreement - all agreements must now be in the form of a settlement agreement.

2. Settlement agreements can be used where there is no ongoing dispute

Although settlement agreements are frequently used where there is an ongoing dispute, such as claims relating to dismissal, they aren’t limited to those situations. An employer may decide that rather than seeking to start a lengthy redundancy process with collective consultation with every staff member, they could achieve the same effect by offering settlement agreements to staff members.

3. Certain conditions must be met before the settlement agreement becomes legally binding

Settlement agreements have a set of requirements that must be met before the agreement is binding (and these requirements are almost identical to the requirements that compromise agreements had!). The requirements are as follows:

  • The agreement must be in writing.
  • The agreement must relate to a particular complaint or proceedings.
  • The employee must have received advice from a relevant independent adviser, such as a lawyer or a certified and authorised member of a trade union.
  • The independent adviser must have a current contract of insurance or professional indemnity covering the risk of a claim by the employee in respect of loss arising from the advice.
  • The agreement must identify the adviser.
  • The agreement must state that the applicable statutory conditions regulating the settlement agreement have been met.


4. Settlement agreements are governed by a Code of Practice

Acas (the Advisory, Conciliation and Arbitration Service) have published a Code of Practice on Settlement Agreements. It is an important read, as it sets out the rights and responsibilities for both sides when a settlement agreement is suggested.

For example, you may have known that employees should be given a reasonable amount of time to consider any proposed agreement, but not known that the Code of Practice specifies that this should be a minimum of 10 calendar days (unless the parties agree otherwise).


5. Discussions about settlement agreements cannot be used as evidence in any Employment Tribunal claims

When there is an existing employment dispute, it is common for negotiations to take place “without prejudice”. Any statements made during a “without prejudice” meeting or contained in a letter marked “without prejudice” cannot be used in a court or tribunal as evidence.

There is an additional confidentiality provision in Section 111A of the Employment Rights Act 1996. Where there is no existing employment dispute, discussions about a settlement agreement are still protected from being used in any subsequent unfair dismissal claim.

6. Settlement agreements offer a quicker, cheaper, and potentially more amicable way to resolve disputes

Employment Tribunal claims are often costly. Some employees are able to agree a funding arrangement with their solicitor, but this means that the amount of compensation is reduced to pay the legal fees. Even in cases where employees or employers represent themselves, the Tribunal process can take a long time with delays of up to 9 months before a final hearing can be heard – and that’s not mentioning all the preparation work to get to a final hearing!

However, settlement agreements can usually be resolved far more quickly, and at a much lower cost. There’s also the advantage of skipping the adversarial tribunal process, which helps to maintain relationships and resolve things in a more amicable manner.

7. Settlement Agreements can’t apply to some claims

Settlement agreements waive an employee’s right to bring one or more claims at an Employment Tribunal. However, some claims are excluded from being covered by the agreement:

  • Claims relating to accrued pension rights
  • Claims relating to personal injury (where this is not known at the time of the agreement)
  • Claims to enforce the agreement

Essentially, this is to prevent the employee for signing away their rights to make a claim where the claim hasn’t arisen at the time of making the agreement.


8. There are different tax rules to payments under settlement agreements

As a general rule, the employee is exempt from paying tax and NI deductions on the first £30,000 received as compensation for loss of employment. However, this depends on the way the payment is structured.

Some contractual payments are not classed as exempt – any holiday pay, salary, or payment in lieu of notice (PILON) will need to have deductions made for both tax and NI contributions.

Solicitors cannot give specific tax advice, but we are partnered with Cheetham Jackson and we can put you in touch with a financial adviser should you need any assistance with your tax liabilities.


9. An employee does not have to accept a settlement agreement.

Settlement agreements are voluntary. Neither the employee nor the employer has to agree to an agreement, or even enter into discussion about the possibility of a settlement agreement. The negotiation process may end with both employer and employee deciding that no agreement can be reached.

If a settlement agreement is not reached, there are a number of options available. A resolution may be pursued through a performance management, disciplinary or grievance process, or may progress to an Employment Tribunal claim.


10. Each settlement agreement is unique

Although this list gives a basic overview of some of the things all settlement agreements have in common, each agreement is unique. The agreement will be drafted to reflect your unique circumstances and cover the situation both parties want it to cover.


We hope this list has provided you with some guidance as to whether a settlement agreement might be right for you. We regularly act for both employers and employees in connection with settlement agreements, and offer guarantees about our costs to reassure you that you know exactly what you will pay.

For employers, we will discuss a fixed fee in advance of beginning any work for you. Where we agree a fee with you, this fee will not be varied. This gives you the certainty of knowing exactly what the work will cost before we begin. The fee will vary depending on the complexity of the agreement.

If you are not sure if a settlement agreement is right for you or your business, we can agree a fixed fee initial meeting to discuss all your options, including the redundancy process or starting performance management.

For employees, where you are being offered a settlement or compromise agreement and your employer is contributing to your legal costs, we guarantee that you will not be charged more than what your employer is prepared to contribute towards those costs for reviewing and advising you on the agreement. A typical contribution by your employer would be between £200 and £500 plus VAT, depending on the complexity of the agreement.

Where your employer is not contributing towards your costs, we will discuss a fixed fee with you in advance of beginning any work for you. Where we agree a fee with you, this fee will not be varied. This gives you the certainty of knowing exactly what the work will cost before we begin. The fees will be in line with the typical contribution set out above, and will vary depending on the complexity of the agreement.

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