Working in employment law, settlement and settlement agreements are never far from our lips but they can remain a little mysterious and some of our readership may be wondering, what is a settlement agreement and how can it help me?
What is a settlement agreement?
A settlement agreement can be considered as the opposite of the contract of employment in that it is a legally binding contract that outlines the terms on which the employment ends, though termination of employment is not always necessary.
Sometimes, a settlement agreement is used purely to settle any claim that an employee may have against your organisation i.e. the individual waives their right to pursue a claim, even if well founded, at tribunal or court.
How can it help my organisation?
As we will be exploring in the short story, below, settlement agreements provide a, usually, speedy resolution to attain a certain outcome, without the need for long, drawn out litigation and the associated costs or stress.
Why do we say speedy, well a settlement agreement can be drawn up, offered and agreed in any period of time. However, it should be borne in mind that the ACAS code of conduct on settlement agreements suggests no less than 10 calendar days is permitted for the individual to receive, consider, take advice and agree on the terms of the settlement agreement.
When we compare the above timescale to a potential resolution at the employment tribunal which is likely to be, at the time of writing, the period of a year away, waiting 10 calendar days, or even allowing an individual an entire month to hand back a settlement agreement brings matters to a much more prompt conclusion.
Turning to certainty, one thing we always advise our clients is that at tribunal, even with the best case in the world, it is never a ‘done deal’ or a ‘cast-iron case’. Ultimately, the judge sitting in the employment tribunal may find the claimant’s evidence more persuading than yours. Therefore, having a legally binding agreement that ensures that the individual waives (gives up) their right to pursue their potential claims against you, gives you peace of mind.
They are worth considering when you are at a cross-roads and you would like to consider alternative dispute resolution.
When can we consider settlement?
You can consider settlement at any stage and we have seen a myriad of reasons why a settlement agreement may be used, including but not limited to:-
paying an exiting employee a good-will gesture, to thank them for their hard work over the years and avoiding any insinuations of wrong-doing;
offering a settlement, instead of going through a disciplinary, performance or redundancy process. You could also consider it during or even after a process;
offering an enhanced redundancy offer to those who have taken voluntary redundancy to reduce the risk of a claim for failure to follow a process;
removing a difficult employee; and
to resolve any previous claims but continue the employment relationship.
Ultimately the timing of the discussions fall to you and your organisation as to when or even if you would like to offer settlement, but sometimes the writing is on the wall and it is in everyone’s interest to come to a swift resolution of the matter.
What are the ‘usual’ terms?
Settlement agreements have a number of necessities, including but not limited to being in writing and ensuring that the individual has received independent legal advice from a relevant adviser as to the terms of the settlement agreement and their effect on them in pursuing any claims at tribunal or court.
There are a number of “usual” terms that organisations need to think about before drawing up a settlement agreement. These include:-
The date on which employment will end (if applicable).
The payment(s) to be made to the individual, which are likely to include:-
notice pay (or worked);
the salary and benefits up to the termination date;
the compensation or ex-gratia figure (this is the incentive and without it, we have advised many individuals that they may as well not sign the settlement agreement; and
accrued but outstanding holiday pay.
Whether, if any, benefits will continue after the termination of employment and, if so, for how long.
Non-derogatory/disparaging remarks by the individual against your organisation, directors, employees etc.
The waiving of particular claims, i.e. that the individual will not pursue against your organisation.
Tax status of each payment and benefit.
Legal fees. These are not legally required but should be offered as a good-will gesture. The amount is entirely up to you and flexibility can be considered but it should be borne in mind that, ultimately, you are not paying for the individual to seek legal advice on their claim against your organisation, it is for advice on the settlement agreement and the terms contained therein.
Return of company property and deletion of any confidential information within their possession outside of the premises of the organisation.
References and internal / external announcements.
Post-termination restrictive covenants and whether they survive from the contract of employment or are new. Bear in mind that settlement agreements usually have an “entire agreement” clause in them making lapsing all previous agreements.
Confidentiality, i.e. what information that they have gained from being part of your organisation that must they keep confidential and what they should keep confidential regarding the settlement agreement. We would suggest that the existence and terms of the settlement agreement should be confidential, with some exceptions.
Now that we know how a settlement agreement can be useful to our organisation, how do we go about implementing one?
Ultimately, settlement agreements are voluntary and the parties do not have to agree to them but usually will if there is an incentive, such as an ex-gratia payment. So, to start the ball rolling then there are two different headings that you can start to have this conversation with your employee:-
a without prejudice conversation; or
a protected conversation.
In practice, the name means very little as both result in an ‘off the record’ conversation and usually some correspondence regarding the proposed settlement agreement. However, there are some differences to the two which we look at below.
Without prejudice means that the conversation or correspondence cannot later be relied upon in any subsequent litigation, for example at tribunal.
For the without prejudice rule to kick in there must be an existing dispute and the correspondence must be made with the view to settling the dispute. Without prejudice headings on letters should not be solely used to simply reiterate to the employee why you think they do not have a case; that would not be viewed as trying to resolve the matter.
Therefore, it would be sensible to ensure that all correspondence, regarding the settling of a dispute, is marked without prejudice and, if you are entering into a verbal conversation, you should seek the agreement of the other side that they want to have a without prejudice conversation.
A protected conversation works in much the same way as a without prejudice conversation, i.e. an offer of settlement is made which cannot later be relied upon at tribunal.
There are some differences, however, between without prejudice conversations and protected conversations. Unlike without prejudice conversations, protected conversations:-
only make conversations about claims for unfair dismissal protected. Therefore, if the employee is alleging claims for discrimination then you may still be exposed on this claim; and
do not require a pre-existing dispute in place.
It is important, therefore, to ensure you approach the conversation in the correct manner.
Additionally, the ‘protected’ aspect of the conversation, i.e. avoiding it being relied upon at a later date, is not without limits. For example, where the organisation acts in a manner that is considered improper behaviour then this could potentially lift the confidential nature of the protected conversations and result in them being relied upon at tribunal or court.
There are a few different ways in which ‘improper behaviour’ may occur but one is not permitting the employee reasonable time to consider the terms of a settlement agreement. Under the ACAS guidance on settlement agreements, it gives the ‘general rule’ of 10 calendar days to consider the final settlement agreement and to take independent advice on it. In the past, we have experiences of employers who have offered 30 minutes to take advice!
The story and our review - https://www.ts-p.co.uk/news/the-story-settlement-agreements