Settlement and Compromise Agreements
Sometimes employers offer employees settlement agreements (formerly known as compromise agreements) to bring their contract of employment to an end, often as a more favourable alternative to redundancy procedure or a disciplinary procedure resulting in dismissal for poor conduct or lack of capability. The certainty and privacy of a settlement agreement often suits both parties.
The advantage of a settlement agreement for the employer is that it can insulate them 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 incurred through a tribunal claim, even if the claim fails. 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. Doing it yourself and missing this step is a complete waste of money as you will have paid the employee off with an unenforceable agreement and they can still bring a claim – even if they signed an agreement. Unless the employee has had independent legal advice and a signed certificate from that adviser the employee’s signature on an agreement with the employer has no effect.
The advantage for the employee is that they should receive more than their strict contractual and/or statutory rights compared to a redundancy package or notice following a decision to dismiss. 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 Law can draft settlement agreements for employer clients. We also act for employees as their independent legal adviser to ensure that they get the best possible deal. There are clear commercial advantages for both parties in a well-balanced settlement agreement – we can help either side to understand these advantages and allow them to reach a satisfactory conclusion.
Our employment lawyers can help to write or advise on agreements that suit and legally protect either party. Get in touch with us today for more information.
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.
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Frequently Asked Questions
Yes, there are 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.
- 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.
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.
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.
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.