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Agreeing settlements: dealing with the past

Written by: Adam Bernstein
Published on: 14 Jul 2022
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Hand shake Image: © iaodesign / Adobe Stock

Image: © iaodesign / Adobe Stock

Disputes in the workplace are, sadly, quite common. While they can end in any one of a number of ways, one option is to put in place a settlement agreement.

Previously known as a compromise agreement, this is a legally binding contract between an employee and their employer, and is typically used to terminate the employment relationship on mutually agreed terms.

Generally, an employer will provide a severance payment in return for the employee’s agreement to waive their right to bring almost all types of legal claim under the agreement. It is often a lengthy contract; however, it will be legally binding once it has been signed.

Much certainty

As to why an employer would want to bring an end to an employee’s employment using a settlement agreement, Sophie Wahba – a solicitor at Wright Hassall – said: “They are used when the employment relationship between an employer and an employee inevitably breaks down; this could be due to several reasons and the most common scenarios are an employee’s conduct, performance, capability or an employee’s role being at risk of redundancy.”

Ms Wahba added that, in many situations, the only alternative to a settlement agreement available to the employer is to follow a lengthy and often costly process to “fairly” terminate the employment relationship. She added that it can be attractive to employees, too, where an enhanced termination payment is on offer, and often an agreed reference and internal announcement will be appended to the agreement.

As Ms Wahba noted: “The agreement will offer certainty and clarity for both parties regarding the severance terms. This is why it is a legal requirement for an employee to take legal advice on the terms of the settlement agreement before signing it.”

Best approach

Procedurally, the most common approach is to offer a settlement agreement during a “protected conversation” under section 111A of the Employment Rights Act 1996.

Ms Wahba pointed out that the protection provided by section 111A only covers situations where a risk of an unfair dismissal claim exists.

She said: “In reality, most Employment Tribunal claims involve additional complaints such as discrimination, and it is in these matters where many employers may inadvertently lose the protection, and elements of the settlement discussions may then become admissible evidence in subsequent Employment Tribunal proceedings.”

But where circumstances do not allow for a protected conversation to occur, say where a dispute is ongoing between the parties, then Ms Wahba recommended that a “without prejudice” conversation may be more appropriate.

She said: “In these types of conversations, provided that they are properly held, the issues discussed and the offers made cannot be used as admissible evidence in Employment Tribunal proceedings should the discussions not result in a settlement.”

Circumstances exist where this protection will not apply. An example of this is where the employer has engaged in improper conduct during the settlement negotiations, such as bullying or seeking to coerce the employee into accepting the offer.

Time to consider

Referring to the risk of improper conduct, Ms Wahba said that under no circumstances should an employee be coerced or placed under undue pressure into accepting a settlement agreement – it is meant to be an entirely free decision.

She referred to the ACAS Code of Practice on settlement agreements, which “while not legally binding, recommends that an employee is given 10 calendar days to consider the offer”.

And, of course, employees may wish to seek legal advice on the offer before they take advice on the terms of the agreement itself, the latter being a legal requirement. Naturally, employers shouldn’t be surprised if the employee seeks to negotiate the initial severance payment – and they may instruct a lawyer to negotiate for them, or they may do so on their behalf.

Offers to employees

As to what to offer an employee, no rule exists. But as Ms Wahba said: “In most cases, it will depend on the circumstances of the proposed termination and the potential risk, or alternative cost, to the employer, should the employee reject the offer and either come back to work, or issue a claim in the Employment Tribunal.”

At this point, it should be said that any notice pay, holiday pay or other contractual payments such as bonus or commission will be taxable as earnings. However, Ms Wahba advised that “as the law currently stands, an employee is entitled to receive up to £30,000 tax-free for payments compensating for the loss of employment. This should be clearly set out within the settlement agreement”.

She added that certain claims exist that a settlement agreement specifically carves out in the agreement itself as not being waived. These include claims by the employee to enforce the settlement agreement if the employer breaches the agreement; claims by the employee in respect of personal injury, of which they were not aware and could not reasonably be expected to be aware of at the date of the settlement agreement (other than claims under discrimination legislation); and claims by the employee in relation to accrued entitlements under the pension scheme.

Ms Wahba noted that further exceptions exist relating to the TUPE Regulations 2006, and in relation to failure to inform and consult in collective redundancy situations.

An employee refuses to sign

A natural question to ask is what happens if an employee refuses to sign. In answer, Ms Wahba said this depends on the circumstances that have led to the settlement agreement being offered in the first place.

However, she explained: “From the employer’s perspective, the alternative option may be to bring the employee back to work, and commence a formal disciplinary or capability process. This may still result in dismissal at the conclusion of the process.”

But from the employee’s perspective, Ms Wahba added: “They may decide against signing if they are not satisfied with the offer that has been made. Instead, they may proceed to issue a claim against their employer in the Employment Tribunal.”

The time frames for bringing Employment Tribunal claims are, though, very strict.

Dealing with breaches

Should a breach of a settlement agreement occur, once concluded, Ms Wahba said it can be enforced in the civil courts, or the Employment Tribunal as a contractual claim, providing the settlement agreement was made before the termination of employment.

Once signed, can an employee “go public” with their story? Again, Ms Wahba’s view is that this “will depend on the circumstances of the matter; an employee cannot be prevented from reporting a crime to the police or ‘blowing the whistle’, even if they have signed a settlement agreement”.

Summary

Settlement agreements have a role to play in the workplace.

However, all need to recognise that they are legally binding contracts and so all need to hear good advice before getting involved with them.