What are settlement agreements?
A settlement agreement is a legally binding contract between an employer and an employee.
When a settlement agreement is negotiated, an employer and an employee seek to agree to a set of terms. In principle, an employee will agree not to bring any legal claims against the Employer, usually in return for a compensation payment and other conditions being met.
Settlement agreements are normally used when employment has ended or is about to be terminated. A settlement agreement is only legally binding if the Employee has obtained legal advice before entering into the Agreement.
What is the difference between settlement agreements and compromise agreements?
There is no difference between settlement agreements and compromise agreements.
Until 29th July 2013, a settlement agreement was called a ‘compromise agreement’. The Government changed the name to provide a more accurate description of the Contract’s purpose.
Why do employers use settlement agreements?
Employers generally use settlement agreements to terminate an employment contract by mutual consent whilst protecting their interests.
Once a settlement agreement is signed, an employee cannot then make a legal claim against their employer for a breach of employment rights or the termination of their employment.
An employer might use a settlement agreement in the following circumstances:
- An employee’s role is being made redundant, but the Employer does not want to go through a long consultation process. The Employee might sign a settlement agreement in return for being paid additional redundancy pay and payment in lieu of notice.
- An employee’s performance is inadequate, or there has been misconduct. A settlement agreement might be offered in return for the Employee leaving quietly. The Employer might offer to provide the Employee with a reference and make no record of dismissal.
- An unfair dismissal claim has been brought against the Employer. If the Employer thinks they will lose the Claim they may offer a former employee a settlement agreement. The ex-employee will receive an amount of money in return for agreeing not to take their case to an employment tribunal.
- A discrimination claim is being brought against the Employer. The Employer might settle the Claim to save the cost of defending the case, even if they believe they may win.
- An employee is in poor health and unable to do their job. In this case, they may be classed as disabled under the Equality Act 2010. The Employer must make ‘reasonable adjustments’ to enable the Employee to continue to work under the Act. If the Employee is still unable to work, they might agree to leave in return for payment. An employment settlement agreement may be signed to prevent the Employee from bringing a claim against the Employer.
Confidentiality clauses are often found in settlement agreements. This means an employee cannot disclose the terms of the Agreement they have signed to anybody else. It can also mean the Employee is not allowed to tell anybody else they have signed a settlement agreement.
An employer may include a confidentiality clause to protect their reputation by stopping an employee from making defamatory statements.
There may be other clauses an employer may wish to include, so they do not leave themselves open to a claim or other employees seeking to negotiate the same settlement terms.