Settlement agreements are legally binding contracts in which one person, usually an employee, agrees to waive their rights to bring a claim in the employment tribunal or a court in return for another person, typically their employer, agreeing to do something, such as paying them a sum of money and agreeing to give them a reference.
As Tony Irving, dispute resolution lawyer at Hancock Quins in Watford, Hertfordshire explains, used properly settlement agreements can be an effective tool for dealing with workplace problems in a discrete and controlled way:
‘If you have an issue with an employee or someone else who works for you, negotiating a mutually acceptable resolution is often the best way to deal with things. Recording the terms of that resolution in a settlement agreement ensures there can be no change of heart and enables you to move on, safe in the knowledge that the matter is done and dusted.’
When might a settlement agreement be appropriate?
A settlement agreement may be appropriate in any case where a contract of employment needs to be ended or where an ongoing workplace dispute needs to be resolved, and terms for dealing with the matter can be agreed.
So, for example, a settlement agreement could be used to record an employee’s agreement to resign their position in return for the payment of compensation, in circumstances where grounds for lawfully dismissing the employee do not exist. A settlement agreement could also be used to draw a line under a long-running dispute with a group of workers about the rate at which overtime is paid.
The approach of employers to settlement agreements varies: some take a belt and braces view and use settlement agreements to record the terms on which any potentially contentious issue is resolved. Others, however, reserve their use to those occasions where they want to do something they are not sure the law would otherwise permit.
How to initiate discussions about a possible settlement
Having ‘off the record’ discussions can be a useful way of finding out whether someone you are having problems with might be interested in trying to reach some sort of compromise rather than taking the matter as far as an employment tribunal or the court.
Genuine off the record discussions are treated as private and confidential, which means you can talk freely about possible terms for compromise without fear that anything you say or suggest may subsequently be held against you if settlement is not possible and the matter escalates.
In employment disputes, there are two main types of off the record discussion:
- ‘without prejudice’ discussions, which cover cases where a dispute with an employee or someone else who works for you has already arisen; and
- ‘protected conversations’, which cover cases concerning employees where a dispute may not yet have arisen (and indeed the employee may not even be aware that a problem exists) but there is a risk that if a dispute did occur it could give rise to an unfair dismissal claim.
The rules on both types of discussion are complicated.
Care, in particular, is needed with protected conversations where there is a risk that a dispute may give rise to claims other than unfair dismissal, for example where a pregnant, disabled or ethnic minority worker is involved and there may therefore also be potential issues of discrimination which could be alleged.
You also need to choose your words carefully with protected conversations because if an employee can show they have been subjected to undue pressure to sign an agreement, for example by being told they need to ‘sign a settlement agreement now or face dismissal’, it is unlikely that protection will be available.
ACAS have published a code of practice on settlement agreements which, among other things, gives helpful guidance on protected conversations:
However, you should still talk to your solicitor before taking any action to ensure that negotiations are handled correctly and the terms of the settlement agreement fully reflect what has been agreed and protects your position to the fullest extent possible.
Recommend provisions to include
Depending on the circumstances, your solicitor may suggest including one or more of the following provisions in a settlement agreement:
- a requirement to keep the existence and terms of the agreement confidential, particularly if you are concerned that any action, such as the making of a compensation payment, could set a precedent or cause unrest among other staff;
- a prohibition on the departing person making derogatory comments about you or your organisation orally, on-line and in print, to limit the risk of reputational damage;
- an agreed statement explaining the reasons for the person’s departure where questions are likely to be raised, for example where departure is sudden or unexpected or if they hold a senior position; and
- the agreed text of any reference.
Existing contractual obligations, such as restrictive covenants, may also be reinforced or extended in the agreement. However, care needs to be taken with this as there may be tax consequences.
Other things to consider
To be legally binding, a settlement agreement must be made in writing and entered voluntarily. An employee who is offered a settlement agreement by their employer must also be given independent legal advice on the terms and effect of the agreement and the employer usually pays a contribution towards the cost of this.
The taxation of any payments made under the terms of the agreement also need to be considered, particularly in light of new rules due to come into effect in April 2018.
Currently, employers can pay the first £30,000 of an employment termination payment free of income tax and the whole of the payment free of national insurance contributions, so long as the payment is not a contractual entitlement.
From April 2018, the government proposes that although the £30,000 exemption will still apply:
- employer national insurance contributions (but not employee contributions) will be payable on the excess above £30,000; and
- all payments in lieu of notice will be taxable and subject to national insurance contributions.
For a confidential discussion about safely initiating a conversation with someone who works for you and who you are keen to dismiss or deal with, or for advice on how to ensure a settlement agreement is fit for purpose, please contact Tony Irving on 01923 650853 or email firstname.lastname@example.org.
The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. The law may have changed since this article was published. Readers should not act on the basis of the information included and should take appropriate professional advice upon their own particular circumstances.