Knowing what a settlement agreement is is the first step, but it’s important you seek independent legal advice, as settlement agreements are usually drawn up by the employer, on their terms.

When can a settlement agreement be used?

A settlement agreement can be used in a number of different situations. It is becoming more common to see them being used when a redundancy takes place. In these circumstances, employees will usually be paid over and above what they are entitled to under statute, in exchange for agreeing not to take their employer to a tribunal.

What is contained in a settlement agreement?

Usually the employer will pay the employee a ‘settlement payment’ (these are often referred to as ex gratia or termination payments), and in exchange the employee confirms that they will not take the employer to a tribunal or court.

Non disclosure agreements

Most settlement agreements now contain a Non-Disclosure Agreement (NDA) confirming that the employee will not be able to speak about the circumstances surrounding the termination of their employment or the settlement agreement itself.

It is common for exceptions to be stated in the document and these usually include:

• The employee’s spouse or civil partner and immediate family, provided that they also agree to keep the matter confidential.
• Anyone who owes the employee a care of duty (including legal advisors, some financial advisors and medical professionals).
• An insurance provider for the purposes of processing a claim for loss of employment.
• A recruitment consultant or future employer, but only to the extent necessary to discuss employment history (for example that the employee was made redundant).

Legally, NDAs are not able to prevent an employee from reporting a criminal offence or assisting with a criminal investigation or prosecution; reporting a matter to a supervisory authority or ombudsman; or complying with a law or an order of the court.

The NDA should also not apply to an employee making a ‘Protected Disclosure’ which is more commonly referred to as whistleblowing.

Making your settlement agreement legally binding

Now you understand what a settlement agreement is, it’s important to consider what’s needed to ensure the agreement is legally binding.

Settlement agreements are not valid and binding unless the employee has received advice in relation to the agreement. This advice can come from a legal advisor, such as a solicitor or barrister. Sometimes trade unions can give this advice. Usually, the employer will contribute towards the employee’s legal fees in relation to getting this advice.

The advisor will be able to provide guidance on whether the settlement offered is ‘good’ or whether they would be better taking their employer to a tribunal. It is for an employee to decide whether or not they wish to sign the agreement or proceed to a tribunal. An employee’s legal advisor will be able to advise them on the terms of the agreement and they will usually sign a certificate to confirm that they have explained the terms of the agreement to the employee.

Settlement agreements must contain the following to be valid:-

• Must be in writing.
• Must cover the dispute.
• Must give the name of the employee’s legal advisor.
• Must set out what the employee and employer agree to do.
• Must say that the agreement meets the rules about settlement agreements that are contained in various acts.

If the settlement agreement does not comply with the above conditions then it will not be binding on an employee although it will remain binding on an employer.

Settlement agreements are one of only two ways that employees are able to legally agree not to exercise their employment rights by taking their employer to a tribunal. The only other way that this is achieved is by a COT 3 which is dealt with through ACAS.