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Employment Law: Settlement Agreements Q&A

View profile for Sally Morris
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Q: What is a Settlement Agreement?

A Settlement Agreement is an agreement (formerly known as a Compromise Agreement) whereby an employee or workers agree not to pursue certain statutory Employment Tribunals claims against their employer. They are commonly used to record an employee’s terms of departure where an employee/worker receives a termination payment in return for the waiver of all claims against the employer.

Q: What are the requirements for a valid Settlement Agreement?

For a Settlement Agreement to be valid, certain conditions must be met:

  • The agreement must be in writing.

    The agreement must relate to a particular complaint or particular proceedings.

  • The employee/worker must have received legal advice from a relevant independent adviser on the terms and effect of the proposed agreement and its effect on the employee’s/worker’s 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/worker in respect of the advice.

  • The agreement must identify the relevant independent adviser.

  • The agreement must state that the conditions regulating Settlement Agreements have been satisfied.

Q: What does “without prejudice and subject to contract” mean?

When negotiating a Settlement Agreement, it is usual to specify that all communications are treated as “without prejudice and subject to contract”. The purpose of this is to ensure:

  • The parties can speak freely in negotiations without fear of anything said being used in evidence against them should the negotiations break down.
  • Neither party is legally bound by anything agreed in the negotiations under a final written agreement is signed.

Q: Can my employer propose to terminate my employment?

It is sometimes the case that an employer wants to propose a termination of employment on mutually agreed terms before there is any legal dispute with the employee/worker. This may be for a variety of reasons, but is often because of perceived shortcomings in an individual’s performance, organisational changes, or simply a clash of personalities. Rather than go through capability, redundancy or disciplinary proceedings, with the risk of subsequent litigation and in some cases negative publicity, it is often seen as commercially beneficial to start confidential exit negotiations with a view to a financial settlement.