Settlement Agreements – A Guide
What is a settlement agreement?
A settlement agreement is a legally-binding contract between an employer and an employee, under which the employee agrees to accept some form of benefit (normally a sum of money) in return for agreeing not to bring particular legal claims against their (former) employer. This is why the agreement is called a “settlement agreement” – the employee is agreeing to “settle” their right to bring certain claims in the Employment Tribunal or civil courts.
Employees must receive legal advice from a qualified independent legal adviser before they sign the settlement agreement. The purpose of the legal advice is to allow employees to be completely aware of their legal rights, the terms of the agreement, and their ability to present any form of claim to the Employment Tribunal. Settlement agreements between employers and employees are extremely common in England and Wales but the law stipulates that such agreements cannot be enforceable unless they meet certain “requirements”, one of which is they they receive legal adviser from an independent adviser. We will explore the other requirements later in this article.
To explain the purpose and effect of a settlement agreement, we must first look at the different types of legal rights under UK law that employees may be asked to ‘waive’ under a settlement agreement. These are explained below.
What type of legal employment rights do you have?
You have three broad ‘types’ of employment rights under UK law:
- Contractual rights
- Common law rights
- Statutory rights
Contractual rights are the rights that you have under the terms of your contract of employment. These terms are either express (in writing in the contract or associated documentation) or implied (implied into the contract by, for example, custom and practice). Contractual rights include your right to a particular period of notice; holiday entitlement; your right to receive a salary, any bonus, and/or commission; your position, place of work, and the like.
Common law rights
Common law rights are legal rights that derive from the common law, such as a right to pursue a claim for, for example, negligence and defamation. Common law rights are rights that can normally only be pursued in the civil courts (the County Court or the High Court).
Statutory rights are legal rights that you have under UK legislation. Statutory rights that apply in employment situations are rights that can normally only be pursued in the Employment Tribunal. Statutory rights include (among others):
- Your right not to be unfairly dismissed or constructively unfairly dismissed from your job (employees normally have to have had continuous employment of at least one year if they started employment prior to 6 April 2012, and two years’ continuous employment if their employment commenced on or after 6 April 2012)
- The right to not be discriminated against, harassed or victimized because of your protected characteristic (for example, your gender, age, disability, and/or race, among others) (no qualifying period necessary)
- The right to receive a statutory redundancy payment (employees have to have had continuous employment of two years or more)
- The right to receive written particulars of employment after eight weeks
- The right to not have sums deducted without authorisation from their wages
- Various family rights, such as maternity and paternity rights
This is not an exhaustive list.
Explanation that there are certain overlapping rights.
Waiving your employment rights
Employees have legal rights in the workplace (some of which are listed above), rights that can be enforced in an employment tribunal or court if their employer (or one of the workforce of the employer) does (or fails to do) something which infringes on those legal rights. However, instead of bringing a claim in the employment tribunal or civil courts, you can choose to waive your right to do so and settle your claim through what is called a “settlement agreement”.
If you wish to negotiate a settlement agreement with your employer then you must be careful not to prejudice your position by signing any legal documents without first taking legal advice from a qualified legal adviser (such as a solicitor or barrister, among others). If you have been offered – or wish to try and obtain – a settlement agreement then you should seek legal advice from a specialist adviser before signing any papers – some (although not all) employers are unscrupulous and may try and pressure you into settling your claims for less than they are potentially worth.
Under the Employment Rights Act 1996, employees receive a degree of protection from such unscrupulous employers by the legal requirement that the employee must receive legal advice from an independent adviser for their settlement agreement to be binding. This means that there is a legal requirement that you must seek legal advice from a legal adviser (through a solicitor, barrister, or a trade union, for example) before your settlement agreement can become enforceable. If you fail to take such legal advice then your agreement will not be enforceable and you may not be able to compel your (former) employer to pay you the sums due under the agreement. In order to properly waive your employment rights and create an enforceable settlement agreement, there must be three signatures on your settlement agreement: your signature, a signature on behalf of your employer (by someone who is properly authorised to do so), and your legal adviser’s signature (to confirm that you have been advised as necessary on the agreement).
If you have already started Employment Tribunal proceedings against your employer then you may – instead of using a settlement agreement – use an agreement called a “COT3 agreement” to settle outstanding proceedings. You may, however, wish to take specialist legal advice from an employment solicitor on the terms and effect of your COT3 agreement before signing it.
What constitutes a valid settlement agreement?
In order for a settlement agreement to be valid and enforceable it must must satisfy certain conditions as set out in s.203(3) of the Employment Rights Act 1996. These requirements are as follows:
- The settlement agreement must be in writing
- The agreement must relate to a “particular complaint” or “particular proceedings”
- You must have received legal advice from a relevant independent adviser on the terms and effect of the proposed agreement and its effect on your ability to pursue any rights before an Employment Tribunal
- The legal adviser that you instruct must have a current contract of insurance, or professional indemnity insurance, covering the risk of a claim by you against your legal adviser in respect of legal advice given
- The settlement agreement must identify the adviser; and
- The settlement agreement must stated that the conditions regulating compromise agreement/settlement agreements have been satisfied
If your agreement does not meet the above criteria then it will not settle your statutory claims – this would mean that you would technically be able to pursue your (former) employer for your statutory rights. However, the practical effect of doing so will probably be that you will have to pay back some or all of the payments made to you under the settlement agreement).
What is the effect of a valid settlement agreement?
The effect of a valid settlement agreement is that an Employment Tribunal will no longer had the jurisdiction to hear claims based on the statutory rights that you have and which are waived under your settlement agreement. Depending upon the wording of the agreement, you may also be prevented from bringing other forms of claims, such as claims for breach of contract or common law claims (such as a claim for negligence).
We will discuss your particular circumstances with you when advising you on your settlement agreement, and will advise you separately about the rights that your employer intends to settle in your case.
What claims can’t be settled under a settlement agreement?
It is usual for the following types of claim to be excluded under your settlement agreement (i.e. you should still be allowed to pursue these types of legal claims):
- A claim for your accrued pension
- A claim for any personal injury (or, usually, for any claim for personal injury of which you are not aware or was not reasonably foreseeable as at the date of the agreement); and
- Any claim to enforce the settlement agreement itself
Why do I need to consult a lawyer about my settlement agreement?
This is, as above, a requirement of s.203(3) of the Employment Rights Act 1996 for your settlement agreement to be valid.
The role of a lawyer in advising you on a settlement agreement encompasses the following duties:
- To explain to you the terms and effect of the settlement agreement, in particular its effect on your ability to pursue an Employment Tribunal claim
- To sign a certificate confirming that you have been advised on the agreement
- To confirm that there is a policy of insurance in place that covers the risk of negligent advice being provided to you (we can confirm that Redmans Solicitors have an appropriate policy of insurance)
Is your settlement agreement a good deal for you?
Technically, your legal adviser only has to advise you on the terms and effect of the settlement agreement that you are signing, with regards in particular to the effect of the agreement on your ability to pursue an Employment Tribunal claim, and does not have to advise you on the merits of your potential legal claims against your employer i.e. whether the settlement agreement represents a “good deal” or a “bad deal” for you.
Our lawyers can of course provide you with advice on the merits of your particular legal claims if you request us to do so. We can also advise you on negotiating the wording of the agreement, should you wish us to do so. The cost of providing this further advice may be covered within the reasonable legal costs that your employer is prepared to pay but if you require substantive advice on these issues then it may fall outside of these reasonable legal costs. It’s a good idea to speak to your lawyer at an early stage to determine the cost of such advice and to prevent any potential misunderstandings.
Generally speaking, if the sums that your employer is willing to pay to you under the settlement agreement are higher than the sums that you would receive under your minimum contractual and/or statutory entitlement and, further, represents a reasonable assessment of the likely value of your Employment Tribunal claim, then there may be merit in signing the agreement. However, what you must bear in mind is that it is not always straightforward to estimate the value of a potential Employment Tribunal claim, particularly if you have not yet left your employment. It can also be problematic to estimate the value of an Employment Tribunal claim in any event – compensation in Tribunal claims is mainly based upon your loss of earnings from the date that your employment terminated until a future date (normally the date on which you got another job which pays at least as much as your old job or until the date of the Employment Tribunal); it’s difficult to estimate when you might receive employment in the future and, further, it can also be difficult to predict what arguments your employer might use to reduce your compensation. Finally, the process of an Employment Tribunal claim is not always straightforward and this may mean that it could be difficult to estimate your legal costs for pursuing the claim.
However, although there are – as above – certain obstacles to valuing your settlement agreement, we will always try and provide you with the best possible advice and provide you with as much information as possible to allow you to make a reasoned decision about whether or not you wish to sign your settlement agreement.
What happens if you choose not to sign your settlement agreement
If you choose not to sign your settlement agreement then this means that you can still potentially pursue your employer in respect of legal rights that you believe your employer has infringed upon. We will advise you on what potential consequences your rejection of the settlement agreement will have – including the potential termination of your contract of employment – and outline some practical next steps for you. However, you should be aware that if you do reject the settlement agreement then your employer will not make a contribution to your fees and you will be responsible for all of the legal fees that we have incurred in advising you.
If you wish to make an Employment Tribunal claim (instead of signing a settlement agreement), then you must first notify ACAS of the details of your claim and engage in “Pre-Claim Conciliation”. If your claim doesn’t settle in the conciliation period (a period of up to one month) then ACAS will issue a certificate which certifies that you have engaged in pre-claim conciliation; this allows you to then bring an Employment Tribunal claim, should you wish to do so. However, the new ACAS pre-claim conciliation service may make the limitation dates for your claim more difficult to calculate and you are advised to seek specialist legal advice on this.
Signing the settlement agreement: it’s your decision
Although our job is to provide you with legal advice on your settlement agreement, it’s not for us to tell you whether to sign your settlement agreement or not – you must make this decision. If you instruct us to advise you on the merits of your Employment Tribunal claims and whether the value of the settlement agreement represents a “good deal”, we aim to give you the best possible information to allow you to make an informed choice about your settlement agreement.