Settlement Agreement (Compromise Agreement)

 Settlement Agreements came into effect on the 29th of July 2013.

From 29 July 2013 Compromise Agreements have been replaced by Settlement Agreements.

Settlement Agreements are, on the face of it, the same as Compromise Agreements, albeit with a new name; the same conditions need to be satisfied for them to be legally binding and they have the same effect of terminating the employment relationship whilst compromising an employees’ employment rights.

A Settlement Agreement (formerly known as a Compromise Agreement) is a legally binding contract between an employee and employer which is used to end an employment relationship on agreed terms. In return, the employee generally receives a financial settlement and an agreed form of reference.

There is a range of scenarios in which Settlement Agreements are used. Settlement Agreements can be used to end an employment relationship on agreed terms. They can also be used to resolve an ongoing workplace dispute. Settlement Agreements are often used to safeguard the interests of both employer (who gain certainty they won’t face a tribunal case on any of the grounds covered by the agreement) and employee (who gets a payment and avoids a dismissal in their employment history).

Settlement Agreements can be proposed by either an employer or an employee and they are voluntary, the parties do not have to agree to them or enter into discussions about them if they do not wish to do so.

Prior to 29th July 2013, Settlement Agreements were known as Compromise Agreements.

In practice, there is little difference between a Compromise Agreement and a Settlement Agreement. The main difference between the two is that Compromise Agreements provided limited protection as the “without prejudice” principle applies only to pre-termination discussions entered into between an employer and an employee where there is an existing employment dispute between the parties. Without prejudice is a common law principle which prevents statements (written or oral) made in a genuine attempt to settle an existing dispute from being put before a court as evidence against the interest of the party which made them.

In other words, in order to benefit from the without prejudice protection there must be an existing employment dispute between the parties before pre-termination discussions take place; without a formal dispute, the without prejudice principle does not apply. In fact, if no dispute exists pre-termination discussions are not covered by the without prejudice principle and they can be referred to in a subsequent tribunal claim.

Settlement Agreements introduced the concept of “confidential” pre-termination discussions.

Under the new Settlement Agreements pre-termination discussions where there is no existing dispute are confidential and cannot be used as evidence in unfair dismissal claims. Thus, employers and employees are now able to enter into pre-termination discussions without fear of such discussions being used as evidence in subsequent employment tribunal proceedings, in circumstances where there is not an existing dispute.

Under the new Settlement Agreements pre-termination discussions/negotiations are kept confidential whether there is, or is not, an existing employment dispute, or where one or more of the parties is unaware that there is an employment problem. Furthermore, where there is an existing dispute between the employer and employee, both the 'without prejudice' and new statutory confidentiality provisions will apply, as the new “confidential” and the existing “without prejudice” rules run concurrently.

To obtain the new “confidential” protection, pre-termination discussions must only be used in circumstances involving a “straight forward” unfair dismissal claim. Pre-termination discussions are not protected if the employee has been dismissed for an automatically unfair reason. Employees are not prevented from bringing claims in relation to 'automatically unfair' dismissals, such as for whistleblowing, trade union membership or asserting a statutory right, by virtue of having entered into a Settlement Agreement. The confidentiality provisions also do not apply to grounds other than unfair dismissal, such as claims of discrimination, harassment, victimisation or claims relating to breach of contract.

Furthermore, the “confidential” protection also does not apply where there is "improper behaviour" by one of the parties, in which case the tribunal will allow evidence to the extent that it considers it "just". Improper behaviour, by either an employer or employee, includes all forms of harassment, bullying and intimidation; physical assault or the threat of physical assault; victimisation; discrimination; and putting undue pressure on a party, which can include not giving an employee sufficient time to consider an offer.

Consequently, in the instances above, an employee can use the contents of pre-termination discussions as evidence to support their claim.

To assist employers, employees and their representatives understand the implications of the changes introduced to the Employment Rights Act (ERA) 1996 in relation to negotiation of settlement agreements; ACAS have produced a Code of Practice on Settlement Agreements (“the Code”). The Code is statutory, but failure to follow it does not entitle an employee to bring a claim for this reason alone.

In order for a Settlement Agreement to be valid it must comply with stringent statutory conditions. The following conditions must be satisfied in order for the Settlement Agreement to be valid. If these conditions are not satisfied then the Settlement Agreement is not legally binding:

• The agreement must be in writing.
• The agreement must relate to a particular complaint or proceedings
• The employee must have received independent legal advice on the terms and effect of the proposed agreement
• The agreement must identify the adviser
• The adviser must be covered by a suitable insurance policy. The policy must cover the adviser against the risk of a claim for losses because of the advice that has been given
• The agreement must state that the applicable statutory conditions regulating the settlement agreement have been met.

The Code requires that employees should be given a reasonable amount of time to consider the proposed conditions of the agreement and specifies a minimum of 10 calendar days unless the parties agree otherwise.

This Settlement Agreement template is up to date and fully comprehensive; it complies with the Equality Act 2010 and section 111A of the Employment Rights Act (ERA) 1996 and is suitable for settling the claim of any employee.

Furthermore, this Settlement Agreement contains provisions ensuring that post-termination restrictions, such as confidentiality and restrictive covenants, contained in the employee's employment contract will continue to apply after the termination date.

N.B., It is a common mistake to think that, where any payment is made on termination of employment, it is not taxable unless it exceeds £30,000.

The taxation of payments made on termination of employment depends on the type of payment made to an employee. If a payment or benefit is an entitlement under the contract of employment or the payment or benefit derives from the employment, it will constitute employment income and will be subject to tax. If a payment or benefit is not employment income, it is not taxable. Thus, if a termination payment and the value of any post-termination benefits is not taxable, the first £30,000 will be tax free.

This Settlement Agreement contains the following clauses:

1. Definitions and Interpretation
2. Termination Date
3. Payments, Expenses and Benefits
4. Gardening Leave
5. Company Property
6. Compensation
7. Settlement of Claims
8. Withdrawal of Proceedings
9. Reference
10. Legal Advice
11. Restrictions and Confidentiality
12. Additional Warranties
13. Compliance with Legislation
14. Severability
15. Variation
16. Completion
17. Third Parties
18. Governing Law and Jurisdiction

Schedule 1: Issues under Consideration

Schedule 2: Agreed Form of Reference

Schedule 3: Adviser’s Certificate

Schedule 4: Agreed Form Order

This Settlement Agreement template is in Microsoft Word format, written in plain English, easy to use and edit.

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Settlement Agreement (Compromise Agreement) - Director