Settlement Agreements

Settlement Agreements are essentially a contract between employer and employee to bring the employment relationship to an end. They are most commonly used when there has been a dispute between the employer and the employee. Usually the employer will pay the employee a ‘Settlement Payment’ (these are also 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. 

When can a settlement agreement be used? 

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

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 or immediate family provided that they also agree to keep the matter confidential 
• Anyone who owes the employee a duty of care (to include legal advisors, some financial advisors and medical professionals) 
• An insurance provider for the purposes or 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) 
• HMRC 

Legally, NDA’s 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 of 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. 

Settlement agreements  

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

An employee’s legal advisor will only 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. The advisor will not advise on whether the settlement offered is a good agreement or whether the employee would be better taking their employer to a tribunal and it is for an employee to decide whether or not they wish to sign the agreement or proceed to a tribunal. 

Settlement agreements must contain the following to be valid:- 

• Must be in writing 
• Must cover the dispute 
• Must give the name of the employees 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 the two only 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.