Settlement Agreements

Settlement Agreement Q & A

  1. What is a Settlement Agreement?

A Settlement Agreement is a legally binding contract between an employer and employee which settles claims that an employee may have against their employer.

A Settlement Agreement is usually used in connection with ending the employment, but it doesn’t have to be. A Settlement Agreement could also be used where the employment is ongoing, but both parties want to settle a dispute that has arisen between them.

  1. Why do employers use Settlement Agreements?

Employers will often offer a Settlement Agreement when they want to terminate an employee’s contract on terms mutually agreed with an employee. This is so that there is a clean break with no opportunity for an employee to take the employer to the Employment Tribunal for more money.

There is a range of situations in which Settlement Agreements are used. They usually apply where the employer does not want to follow what could be a long, drawn-out process, such as a performance review or a full redundancy process, before being able to terminate. Also, where you already have issues about discrimination or have raised a grievance, the employer may want to circumvent a claim e.g. for constructive unfair dismissal and/or discrimination or other grounds..

  1. Why does an employee need to seek advice independent legal advice?

A Settlement Agreement is only valid, legal and enforceable in law if a solicitor or certified trade union adviser confirms that an employee has received separate and independent legal advice. This is usually done by signing a separate adviser’s certificate confirming that advice was given to the employee as to the nature and effect of the Settlement Agreement, although there is no legal requirement for such certificate.

  1. Can an employee be placed on Garden Leave until their employment is terminated?

    A Settlement Agreement may provide that an employee will be placed on “garden leave” until the end of their employment if their contract of employment includes a garden leave provision.

    If an employee is placed on garden leave they will not be required to attend work. However they remain an employee.

    Most employees are more than happy to be placed on garden leave because they continue to get paid without having to attend work.

  2. What protection under the Employment Rights Act 1996 does an employer have?

    Employers can hold 'off the record' conversations with employees that cannot be referred to in any later unfair dismissal proceedings (often known as 's.111A conversations'). Section 111 conversations can be initiated by either the employer or the employee.

    The conversation will not be admissible in any future unfair dismissal proceedings provided:

    •it relates to the ending of the employment relationship;

    •a settlement offer is made or there are negotiations about the employment being terminated; and

    •it does not involve 'improper behaviour' (see below).

    What is improper behaviour?

  3. There is no legal definition of 'improper behaviour', but it would include:

    •any form of bullying or intimidation towards the employee;

    •putting undue pressure on the employee to accept the severance offer, e.g. by setting an unreasonably short timescale; or

    •informing the employee that they will be dismissed if they do not accept the severance offer.

    Where there has been any 'improper behaviour' by an employer in a s.111A conversation, the s.111A protection will be lost. However it is possible, and recommended, for an employer to inform the employee, in a neutral manner, of the alternatives that may occur if an agreement cannot be achieved (for example, the possibility of future disciplinary action which could ultimately result in dismissal) to allow them to make an informed choice as to the options available to them.

    What happens if an employee doesn’t sign a Settlement Agreement and pursues a claim in the Employment Tribunal?

If an employee has a potential claim for any type of discrimination due to a “protected characteristic” – such as age, disability, maternity, pregnancy, race, religion or belief, sex, or sexual orientation – or claims for automatic unfair dismissal such as whistleblowing or for raising health and safety issues then any conversations and documents surrounding the offer of a Settlement Agreement can be brought to the attention of an Employment Tribunal.

If the employee pursues any other types of the claim against the employer then the employer is protected by S111A Employment Rights Act 1996.

  1. Can an employer threaten to dismiss an employee if they do not accept the Settlement Agreement?

Threatening dismissal before any form of disciplinary process has begun constitutes improper behaviour and will be disclosable to a Tribunal. The likelihood is that an employee will want to raise a grievance about this type of behaviour which, if not upheld, may result in an employee resigning and claiming constructive unfair dismissal.

  1. What would an employer expect to pay under a Settlement Agreement?
  • Compensation for loss of office/ex gratia payment
  • Any contractual entitlements including but not limited to:
    • Payment in Lieu of Notice
    • Accrued by untaken holiday entitlement
    • Bonus and commission
    • Medical and life insurance
    • Car allowances
    • Loss of earnings anticipating a delay in finding alternative employment
  1. Does an employer have to contribute to an employee’s legal fees?

It is common for an employer to make a contribution towards an employee’s legal fees. This is usually between £350 and £500 (plus VAT) depending on the complexity and breadth of the issues but is likely to cover all of an employee’s legal fees in a straightforward matter. In some cases, an employer may pay more particularly if there are complicated post-termination covenants or an employee is at a senior level.

For more information please visit our website www.mosshaselhurst.co.uk and view our Guide to Settlement Agreements.