Guide to Settlement Agreements for Employers

A settlement agreement (formally known as a compromise agreement) is a legally binding agreement between a business and an employee under which the employee agrees to settle their potential claims often in return the employer will agree to pay financial compensation. Sometimes the settlement agreement will include other things of benefit to the employee, such as an agreed reference.

Settlement agreements are more typically associated with the ending of an employee’s employment – issued either shortly before or after the employment has ended. However, settlement agreements can also be used when an employee’s employment is to continue with the business – for example, if the employee has alleged harassment and that allegation is upheld on investigation.

An employee can make a claim against the business under both their contract of employment (e.g. a wages claim) and under statute (e.g. discrimination and/or unfair dismissal claims). The claims can arise:

• on recruitment;
• during employment; or
• when their employment has been terminated.

Accordingly, settlement agreements can be used at any point during the employment (or potential employment) relationship.

For a settlement agreement to be legally binding there are a number of conditions that must be met which include:

• The agreement must be in writing;
• The agreement must relate to a particular complaint or particular proceedings;
• The employee must have received legal advice from a relevant independent adviser (for example, a qualified lawyer or union official) on:
• The terms and effects of the proposed agreement; and
• Its effect on their ability to pursue any rights before an employment tribunal
• The independent adviser must have a current contract of insurance (or professional indemnity insurance) covering the risk of a claim against them by the employee for the advice;
• The employee’s adviser must be identified in the Agreement; and
• The agreement must state that the conditions regulating settlement agreements have been satisfied.

Other than complying with the legal requirements listed above, the contents of a settlement agreement are largely at the discretion of the business and therefore subject to possible negotiation with the employee involved.

Examples of common clauses include:

• Compensation for loss of employment.
• Contribution to the employee’s legal fees.
• A waiver of claims by the employee, including a warranty that the claims listed are the only claims that the employee has against the business.
• Re-assertion or modification of existing restrictive covenants and/or inclusion of new restrictive covenants.
• Re-assertion or modification of existing confidential information obligations and/or inclusion of new confidential information obligations.
• An Indemnity from an employee in relation to tax and national insurance contributions.

There are a number of statutory claims that cannot be settled by entering into a settlement agreement, such as some types of:

• Personal injury claims;
• Pension claims; and
• Claims following the transfer of a business.