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Settlement and Compromise Agreements

Sometimes employers offer employees settlement agreements to bring their contract of employment to an end.

The advantage of a settlement agreement is that it can insulate the employer from any claims from the employee except for latent personal injury claims and accrued pension rights. This is particularly important because generally employers cannot recover their legal costs of a tribunal claim even if the claim fails.

The advantage for the employee is that they should get more than their strict contractual and/or statutory rights. However, the employee may get less than the sum they may be entitled to after bringing a successful claim. Nevertheless the employee will avoid the stress, risk and legal expense of bringing a claim and will be able to move on swiftly.

Helix is able to draft settlement agreements for its employer clients. We also act for employees and ensure they get the best possible deal. There are clear commercial advantages for both parties in a well balanced settlement agreement.

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It is important for employers to realise that the settlement agreement will not protect them unless the employee gets the advice of an independent legal adviser before signing the agreements

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A settlement agreement (formerly known as a compromise agreement) is something offered by an employer to an employee when terminating their employment. They’re mainly used to legally signify that the employee agrees with the terms of which their employment ended, and to protect the company from future Employment Tribunal claims being brought against it. They are often accompanied by compensation or a termination payment to the employee.

Here are our FAQs regarding settlement and compromise agreements.

Yes, there’s two – the settlement (compromise) agreement explained above, and the COT3 agreement.

A COT3 is when both parties settle on terms of an employee’s contract termination through Acas (the Advisory, Conciliation and Arbitration Service) conciliation. This happens where the worker at first thinks they want to begin an Employment Tribunal case, but after conciliation through Acas, the parties decide to settle out of court.

This type of agreement ensures that neither party can instigate a claim in future. Going through Acas also means that the claim can be resolved without legal advice, which means less of an expense for both parties, although you are free to obtain it if you wish.

Each one will be different, though in general it will include:

  • Amount of settlement payment
  • The date of the employee’s last day working for the company
  • All employment claims that the agreement will waive
  • Confirmation that both parties obtained legal advice and who it was from

Common clauses included:

  • Provisions for references (workers should take note of this, as if there is not a clause in which the employer agrees to give a favourable reference, they are not legally bound to)
  • Confidentiality agreements
  • Post-termination restrictive covenants (e.g. that the employee cannot engage the company’s current clients or staff for business purposes after their contract expires)
  • Taxes applicable to payments involved
  • Non-disparagement clause (preventing the employee from taking future actions that negatively impact the company)

For more information about drawing up a settlement agreement and what you should include, contact Helix Law.

Only the employer and employee – these agreements should be decided through collaboration between the two parties, though they must both seek independent advice from experienced solicitors as this area of law is very complex. Both parties should be clear about their options and rights before accepting the deal, and both may attempt to negotiate.

A further argument for employers to take legal guidance when drafting such agreements is that a legal decision in the past has been made in a former employee’s favour on the basis that the wording used in the document rendered it ineffective. In legal cases, terminology and phrasing can be the difference between an effective and ineffective contract.

Yes – a settlement agreement insulates the company from all employee claims except accrued pension rights and latent personal injury cases. Consult with a solicitor if any of these circumstances affect you.

Yes. A settlement or compromise agreement is a list of terms which both parties agree to regarding the termination of an employee’s employment, which waives their right to bring legal action against the company (unless in circumstances listed above) in exchange for a compensation payment.

Settlement agreements can vary dependant on negotiations between the parties and the individual circumstances involved, whereas redundancy is defined by law. Redundancy is a last resort option for companies who find they need to let go of workers, usually to save company finances that are in trouble. Workers are chosen for redundancy through objective processes; whereas settlement agreements are usually brought on the basis that the worker is underperforming or no longer wanted within the business, but the company has no legal reason to fire them.

However, sometimes employers may offer workers settlement agreements as a favourable alternative to undertaking a lengthy and stressful redundancy procedure. The employee may choose to take a settlement deal as they could receive more money than going through redundancy – they should ask for legal advice to ascertain this. Employers should be aware, though, that employees do not have to sign settlement agreements to leave the company, whereas they are compelled to by law through redundancy procedures.

To determine the best course of action on either side, visit our Redundancy page to learn more, and call Helix Law to book a consultation.

If either party decides they do not agree with the agreement’s terms, they should first attempt to negotiate (with guidance from a lawyer). Possible negotiations include a payment increase or making changes to the terms.

Employees do not have to sign any agreement if:

  • They are asked to do so immediately. Workers must be given a minimum of ten days to consider their options. Asking them to sign before ten days has passed counts as ‘undue pressure’ and has legal ramifications for the employer.
  • They haven’t had legal advice. Every employee faced with a settlement situation should consult with an employment solicitor, the Citizens Advice Bureau, or a union representative.

Normally, the company will pay the employee’s fees when seeking advice, though detailed advice and other negotiations may not be covered. Employers should be aware that even if an employee signs a settlement, if the worker has not had independent legal advice then the company is not protected from future claims.

  • They feel there are claims they want to take to court or Tribunal against the employer. Signing a settlement agreement means that the employee waives their right to bring a claim (bar personal injury and pension rights cases) against the company, including if they feel the employer has acted improperly during the settlement process.
  • They don’t want to. Settlement agreements are not compulsory, and the employee should not feel pressured to sign against their true will. Other reasons for not signing might include finding the terms unacceptable, feeling they have been discriminated against, or feeling pushed out against their will. However, refusal to sign could lead to the employer taking alternative action like disciplinary proceedings.

Employees should take advantage of the offered legal advice to discuss all their options with an experienced employment solicitor. Employers should also secure legal advice at the earliest opportunity where they might want to offer a settlement to a worker.

Helix Law is available to draft settlement agreements for employer clients. We can also act on behalf of employees to ensure they secure the best possible deal. Contact us today to find out how we can help with regards to settlement deals and employment disputes.

Meet the Helix Law team

Contact Helix Law on 01273 761 990 or email: [email protected]