Whilst settlement agreements are not always the solution for every difficult workplace situation, when used appropriately, they can be mutually beneficial to both employer and employee. However, there are a number of points to be aware of and to carefully think through before entering into settlement agreement discussions with an employee.
In this article, we will provide an overview of what settlement agreements are, and how you might use them in a legally compliant way within your organisation.
What is a settlement agreement and why would you use one?
Settlement agreements are legally binding, written agreements made between an employee and an employer, entered into as a way to settle a dispute, disagreement or area of concern. They are typically used for situations such as performance or conduct concerns, or in redundancy.
A settlement agreement can be used to bring employment to an end or can be agreed after employment has ended. Less usually, it can also be used without bringing employment to an end.
In terms of why employers might opt to use one, settlement agreements can be useful to control costs (for example, legal and award costs if a case is taken to tribunal), to manage time and organisational reputation, and to provide assurance that future claims will not be brought to tribunal. Settlement agreements will clearly set out the terms by which both parties are bound, including a list of the claims that cannot be brought by the employee.
In return for signing an agreement preventing an employee from raising future claims they may have considered, an employee is usually offered some form of financial compensation.
By signing a settlement agreement, an employee will also have the benefit of being able to exit an organisation quickly and with dignity, avoiding the stress of lengthy formal action, and often with an agreed reference and agreed organisational communication.
When is it not appropriate to use settlement agreements?
Settlement agreements should not be used routinely or in place of good management practices. Using settlement agreements in this way can contribute to, and further, a workplace culture of poor behaviour. There may be damage caused to employment relations if it is believed that poor performance or conduct is managed and ‘rewarded’ with a financial settlement, rather than through good management.
What is the difference between compromise agreements and settlement agreements?
In short, they are one and the same. In 2013, the Enterprise and Regulatory Reform Act 2013 (ERRA) changed the name compromise agreeent to settlement agreement to better reflect the intentions of the document – to agree a settlement (a resolution and/or payment).
Starting a settlement agreement conversation with an employee
In order to begin a discussion with an employee about reaching a settlement agreement, you will need to ensure that you do this in a way that protects your organisation. If you get this part wrong, you risk the content of your discussions and negotiations and the offers of compensation you have made being used as evidence against you in an employment tribunal at a later date. There are two possible ways to help protect the discussions from being used as evidence later:
- by holding without prejudice conversations; or
- by holding protected conversations.
However, these conversations must be used in the right circumstances and conducted in the right way, as outlined below.
What is the difference between a ‘protected conversation’ and ‘without prejudice’?
There are two legal provisions that allow for settlement agreement discussions, negotiations and offers to remain confidential, and to prevent them from being used as evidence in tribunal at a later date. These are:
- ‘without prejudice’ which is part of common law; and
- ‘protected conversations’ which are provided for under S111A of the Employment Rights Act, 1996.
However, each has conditions that must be met to provide this protection.
The two terms are often, and mistakenly, used interchangeably. There is a clear difference in law between protected and without prejudice discussions.
This is a complex area of law and if you are in any doubt about your particular situation, we would advise that you seek further legal advice. However, the following aims to give a high level overview of the main principles.
Without Prejudice
This is a provision under common law whereby settlement agreement discussions can remain inadmissible as evidence in a fairly wide range of tribunal proceedings, including those for unfair dismissal, breach of contract or unlawful dismissal, so long as:
- there is a genuine attempt to settle an ‘existing dispute’; and
- there is no ‘unambiguous impropriety’
However, the term ‘existing dispute’ is not clearly defined in law, and a very narrow definition has been applied in case law. This means that even where, for example, a grievance has been raised by an employee, or you have ongoing concerns about an employee’s performance, there may still be no ‘existing dispute’. In general, it would be necessary for either party to have already brought, or reasonably have considered bringing, legal proceedings against the other.
Examples of ‘unambiguous impropriety’ include the use of, for example; bribery, fraud, violence, unlawful discrimination, threats or intimidation.
Protected Conversation
‘Protected Conversations’ held under Section 111A of the Employment Rights Act 1996, assist employers to hold pre-termination settlement negotiations. In these discussions, there is no requirement to show that there is an existing dispute.
However, this provision can only be used to protect the admissibility of discussions in claims for unfair dismissal. It will not protect against admissibility of evidence for claims relating to, for example; breach of contract, wrongful dismissal or automatic unfair dismissal or discrimination. The discussions are likely to be admissible even where a claim for unfair dismissal is brought alongside any of these other claims.
In addition, during the discussions there must be no ‘improper behaviour’. Improper behaviour is likely to include actions such as bullying, intimidation and pressurising someone to enter into a settlement agreement (for example, giving an unreasonably short amount of time to consider the offer, or by telling an employee they will definitely be dismissed if they don’t sign). It is not improper, however, to make the employee aware that if they were to decline the offer, they may be required to attend a formal performance review or disciplinary hearing if that is genuinely the case.
It is important to note that any claim for discrimination is likely to not be protected under either a without prejudice or protected conversation meaning that evidence of such would be admissible), as the very nature of discrimination being present could indicate ‘improper behaviour’ or ‘unambiguous impropriety’.
Entering into discussions with an employee
Employers can open discussions about offering settlement agreements either verbally or in writing, although a verbal discussion would be recommended as a first step to avoid the offer coming as a surprise, and to help reduce the chance of any misunderstanding.
In line with the ACAS Code of Practice on settlement agreements, we would recommend the following steps when entering into settlement agreement discussions:
- Clearly set out the reasons for the discussion and for making the offer in a meeting, or meetings with the employee.
- Give the employee the opportunity to ask questions and seek clarity around the situation. Allow them to propose changes to the offer or the written agreement in subsequent meetings or correspondence. Ensure to include a reminder that the conversation is still either without prejudice or protected, and that any terms are subject to contract.
- Hold meetings at a time and in a place that is mutually convenient.
- As settlements must be entered into on a voluntary basis, explain to the employee that the discussions you are having are not expected to be admissible in any later legal proceedings. You may choose to give them a copy of the ACAS Code of Practice.
- Explain to the employee that the discussions will have no impact on any subsequent action that may be taken against them should you not be able to reach a mutually agreeable outcome.
- Explain to the employee that the discussions are entirely voluntary and that they are not obliged to participate in or continue with any discussion and they are free to reject the offer at any time.
- Before you continue, check the employee’s understanding of what they have been told and explain further if there is any uncertainty.
- Whilst it is not a legal requirement to allow the employee to be accompanied, if they have a disability, allowing them to be accompanied may be a reasonable adjustment.
- Make it clear to all parties, including any companion, that the discussions and correspondence are confidential, although, of course, they will need to discuss the details with their legal advisor and their family who are potentially affected by the discussions.
Length of time to consider the terms of a settlement agreement
A question we are often asked to advise on is how long it should take to agree a settlement. The ACAS code of practice on Settlement Agreements states that in general terms, there should be a minimum of 10 calendar days for an employee to consider and seek advice on the terms and effect of the settlement offer, unless agreed otherwise by both parties. In practice, it often takes longer for an employee to properly consider the information, take independent legal advice and agree final terms. This should be factored into any business timelines.
Failure to allow an employee enough time to consider an offer could be viewed as you exerting undue pressure on the employee to accept and sign, resulting in the discussions becoming admissible in tribunal at a later date. However, it’s recommended that employers propose an end date during discussions, subject to seeking advice and agreeing terms, to avoid any confusion or unnecessary delay.
How to ensure settlement agreements are legally enforceable
For settlement agreements to be legally enforceable, the criteria below should be met:
- It must be in writing
- It must signed by the employee
- The employee must have received independent legal advice on the terms and effect of them signing the agreement
- The legal advisor must be identified in the agreement
- The legal advisor must be insured for claims raised by the employee for loss arising from the advice
- The agreement must relate to a particular complaint or proceedings
- The agreement must state that the requirements relating to the settlement agreement have been agreed
Settlement agreement inclusions
The individual clauses that are included in the agreement can be discussed and amended as required according to your particular circumstances. Again, this can be a complex area to navigate.
In general, there are some basic points that would be included:
- The terms of the financial settlement and any other payments. This could include, for example; a settlement payment, redundancy pay, pay in lieu of notice, payment for accrued and untaken holiday.
- Any agreed reference – it is common for a reference to be agreed as part of the discussions.
- Other relevant terms including confidentiality and restrictive covenants. Care should be taken when including confidentiality clauses to ensure they are enforceable and to ensure that nothing in the agreement prevents an employee from making a public interest disclosure (whistleblowing disclosure).
- That the agreement is subject to the employee receiving independent legal advice. The advisor should sign their confirmation that advice has been given and that insurance is in place, and this is usually included as part of the agreement.
- That the employee agrees not to pursue any legal claims against the employer, together with a list of all the potential claims that are prevented.
- The date of termination of employment (if applicable).
Legal advice and settlement agreements
Employers must advise that the employee seeks legal advice about the proposed settlement agreement. For the settlement agreement to be legally enforceable, the employee must obtain independent legal advice from one of the following:
- a qualified solicitor;
- a certified and authorised officer, official, employee or member of an independent trade union; or
- a certified and authorised advice centre worker.
The advisor must have insurance in place that covers them for any future claims raised by the employee for losses as a result of the advice they have been given. The advice they receive must explain to them the terms in the agreement, and inform them of the effect on them of signing the agreement, including that they are waiving their right to bring subsequent claims.
Deciding the right level of compensation
Deciding how much compensation to offer the employee can be a real challenge for employers. Although this is largely subjective to each organisation, as a rule of thumb, you should take into consideration the following when deciding the sum offered:
- the employee’s length of service;
- the reason for entering into the settlement agreement;
- the potential costs involved if a settlement was not entered into, for example the cost of resources required to resolve the issue and the cost to defend a claim at employment tribunal; and
- the impact on the organisation’s reputation and staff morale if the concern/ issue continued.
Tax and settlement agreements
This is another complex area of law and tax advice should be sought if there is any doubt. In general, the following principles apply:
- The first £30,000 of a settlement payment (or the full amount of the payment where this is less than £30,000) can usually be paid free of tax. However, there are some instances where this might not be clear-cut, such as in redundancy situations, so caution is advised. A settlement agreement will usually contain a clause making it clear who is liable for any tax payments that become due in the future.
- Any payment for items such as pay in lieu of notice, garden leave, accrued holiday or expenses payments will be taxable. The settlement agreement should make it clear which payments you expect to be able to make tax free and which will be taxable, to avoid any misunderstanding.
Negotiation and settlement agreements
Once you have proposed a settlement to the employee, the employee can negotiate. It is common for employees to negotiate on the terms of settlement agreements, such as the sum being offered or the wording of an agreed reference, for instance.
Once the counter terms have been proposed, it is for you to decide whether you are willing to accept any suggested amendment to terms. This can result in an extension of the 10 day consideration period to allow both parties to seriously consider the final terms of the agreement.
Can an employee reject a settlement agreement?
Yes, an employee can reject a settlement agreement at any point until it is signed by both parties. Additionally, if you are unable to agree terms, you are also able to withdraw the offer. However, careful thought should be given about what the implications of withdrawing an offer might be, and what action you would need to take next to address the original concern.
If a proposal is rejected, you will need to decide what action you want to take next. This will depend on the original reason for entering into the discussions. If, for example, there was a concern about performance or conduct, formal action/management can start or continue. However, for subsequent action to be fair, the fact that a settlement was rejected should be disregarded and have no bearing on the action being taken or the outcome of the action. Additionally, care should be taken to keep the settlement discussions and correspondence separate and not rely on them or refer to them as part of the formal process.
Employers may, of course, choose to take no action. However, this is not recommended as a way to maintain good employment relationships. Alternatives to formal action, such as mediation, may be appropriate depending on the circumstances.
What happens if the employee accepts the agreement but breaches the terms?
In this case, as the agreement is legally binding, you would be able to make a claim against the employee for breach of contract and damages in the County or High Court.
The same remedy would also be available to an employee if you were to breach the terms of the agreement. It is therefore advisable to ensure that all payments are made within the agreed timescales, including paying the legal advisor. It is also recommended to ensure that as few people as possible know about the agreement (for example, to avoid breaching any confidentiality clauses) and that there is a process in place to provide the agreed employment reference in any subsequent requests. Remember, organisations may continue to receive reference requests for a number of years after settlement agreements have been signed.
What can we do to help?
Although settlement agreements and associated discussions can be complex, they can be a useful and effective way to manage workplace disputes.
At Fitzgerald, we have the expertise and experience to guide you through a settlement agreement discussion and negotiation. For further information and advice, contact us on 0330 223 5253 or drop us an email at: office@fitzgeraldhr.co.uk.
Further reading and helpful resources
ACAS guidance on settlement agreements
A guide on how to manage conflict in the workplace
How to resolve conflict using mediation
Fitzgerald services to support with settlement agreements in your organisation
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