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Compromise - Settlement Agreements

Previously known as Compromise Agreements, a Settlement Agreement is a legally binding document setting out the terms upon which the employer and employee agree to end the employment relationship. This will typically involve the employee agreeing not to bring any tribunal or court claims against the employer in exchange for an agreed sum of money and/or agreed reference. The phrase “waiver of all claims in full and final settlement” is usually found in the Settlement Agreement.

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Why have I been offered a Settlement Agreement by my employer?

Settlement Agreements are a way of ending problems within the employment relationship quickly and privately which is usually to the benefit of both parties. They are sometimes offered by employers as an alternative to having to conduct formal capability, disciplinary or redundancy procedures. In the past Settlement Agreements, or Compromise Agreements as they were known then, could only be used to settle an existing “dispute”. A change in the law in 2013 now allows employers to have “protected conversations” with employees so that they can discuss settlement on a “without prejudice” basis even before a dispute arises. This is sometimes used when the problem is due to a personality clash rather than an actual disciplinary or capability issue.  

What does “without prejudice and subject to contract” mean?

You will often find this phrase on correspondence from your employer proposing or attaching the draft Settlement Agreement. When negotiating the agreement it allows the parties to speak freely without the fear of anything said being used in evidence against them should negotiations break down (but see paragraph below on improper behaviour). Under normal circumstances neither party is legally bound by anything agreed in negotiation until the final written agreement is actually signed. 

My employer says I will be dismissed if I don’t sign the Settlement Agreement. Is that fair?

No it isn’t. The ACAS Code of Practice on Settlement Agreements states that intimidating and aggressive negotiating is improper behaviour that will lose the parties the cloak of the without prejudice rule. Putting undue pressure on a party by threatening to dismiss them if they don’t sign the Settlement Agreement amounts to improper behaviour, as does discrimination. It is not improper however for an employer to say that if the Settlement Agreement cannot be agreed then disciplinary or capability proceedings will go ahead. It would be improper if the employer said at the end of those proceedings the employee would be dismissed.  

It is also improper behaviour for an employee to threaten to undermine an organisation’s reputation if the organisation does not sign the agreement, unless the provisions of the Public Interest Disclosure Act 1998 apply (whistle blowing).  

My employer has only given me a few days to get the agreement signed. Is that fair?

No. Under the ACAS code mentioned above employers should give employees at least 10 days to consider the offer, to take legal advice and to sign the agreement.

How will I know if the compensation payment my employer is offering me is a fair amount or a good deal?

Employers do not generally pluck a figure out of the air on which to base their offer of compensation. It is usually connected to a formula that applies in your circumstances. For example, it may be based on your statutory or contractual redundancy pay plus an additional amount, say one to three months’ extra pay, as a “sweetener” to encourage you to sign the agreement. Sometimes it will be based on the amount of time it would take your employer to conduct a capability or disciplinary procedure. When you are considering whether to accept the sum offered or not, you will need to take into account the costs of litigating a claim, any legal fees you would need to spend that you would not be able to recover, the time and stress of bringing tribunal proceedings plus the advantages of an agreed reference. Even if you win an employment tribunal case the tribunal cannot order the employer to give you a reference. Sometimes an agreed reference can be the most important part of the settlement agreement.

Although a solicitor is not legally obliged to advise you on whether the compensation sum is a fair deal or not, at Cartwright King we believe that it is an important part of our service to you as our client to help you make this assessment. Our experienced solicitors will be able to assess how much compensation you might be awarded if your claim was to be successful, compared with what is being offered to you under the terms of the agreement.

Why do I need a solicitor to sign off the agreement?

Because you are waiving your rights to bring any further claims against your employer (but see personal injury and pensions exceptions below) and agreeing to comply with a number of other terms, parliament decided that settlement agreements can only be legally binding if you have taken independent legal advice from a solicitor (or other authorised representative). You are free to choose your own solicitor and do not have to use the solicitor recommended to you by your employer if you don’t want to. Even if that solicitor has been recommended by your employer, they will still have a duty to be independent and act in your best interests, not in your employer’s.

Will my employer pay some or all of my legal fees to see a solicitor?

Although employers have no legal obligation to contribute towards your legal fees, virtually all of them do. The amount they will pay varies depending on the type and size of employer, the nature of their business and sometimes the region they are based in. In straight forward cases where you are happy with the terms being offered, the employer’s contribution will usually cover all of your legal fees and there will be nothing extra to pay. Sometimes an employee may ask us to negotiate a better deal for them. Where we believe there are grounds to increase the offer or change some of the terms of the agreement, we will quote you a fee for our time which you are then free to accept or reject. Often our employee clients have been happy to pay our additional charge as their compensation payment has been increased as a result of our work and more than covers the additional costs they have paid to us.

If you do instruct us, we will invoice your employer directly for their contribution so you will generally not have to pay anything up front.

How much of my compensation payment will be tax free?

The first £30,000 of any compensation payment for loss of office will be paid free of tax and national insurance. This includes any amount to cover statutory redundancy pay. If your payment is going to include pay in lieu of notice, this will be subject to tax and national insurance deductions. 

Can I tell my colleagues about the Settlement Agreement?

Absolutely not. One of the reasons employers offer settlement agreements is to keep all details of any dispute and the compensation payment strictly confidential. The only people you are allowed to tell about your settlement agreement are members of your immediate family, providing they agree to maintain confidentiality, your legal adviser and HMRC.

Why should I sign a confidentiality clause which is a “gagging order”?

As mentioned above, one of the key attractions for employers (besides the certainty that an employee won’t bring a claim against them) is that the matter will be kept confidential. However, this confidentiality doesn’t apply to whistle-blowing and the agreement should contain a clause stating that nothing in the agreement shall prevent the employee from making a protected disclosure (blowing the whistle) under Section 43A of the Employment Rights Act 1996.

What if I don’t want to sign the settlement agreement or I am unsure about it?

If you don’t want to sign it, don’t. You may be confident that you can overcome any difficulties posed by the disciplinary or capability procedure and you will be able to carry on working for your employer. Or you may be confident that an employment tribunal claim would succeed with your eventual compensation being far in excess of what is being offered by the agreement.  In reality however, most employees who are facing disciplinary or capability proceedings are often keen to leave that employment on agreed terms and start afresh elsewhere. 

The agreement contains clauses that I must not make derogatory comments about my employers. Is that normal?

Yes, this is perfectly normal. Remember not to talk about your employer on Facebook or other social media because even if you use privacy settings your comments can still be copied and forwarded on to others.

Can I still bring a personal injury claim against my employer if I sign this agreement?

It depends. Your employer cannot and should not exclude a personal injury claim which has not yet arisen or which you are not yet aware of. This may sound odd but it could happen where, for example, you have been exposed to chemicals in the work place and your personal injury only develops several years later after the agreement is signed. Claims for personal injury arising from harassment or unlawful discrimination can be waived under the Settlement Agreement. If you have a current personal injury claim against your employer you will either need to settle that as well or ensure that the agreement contains a clause that clearly states that this claim is ongoing and will not be waived.  

Are there any other rights that cannot be waived under a Settlement Agreement?

Under Section 91 of the Pensions Act 1995 it is not possible to waive any accrued pension rights (except in very limited circumstances). Your Settlement Agreement should include a clause saying the waiver will not apply to accrued pension rights. This clause is usually found next to the clause relating to personal injury claims.

My draft Settlement Agreement contains employee warranties. What are these and how important are they?

Very important. It is common practice for warranties from the employer to be included in the Settlement Agreement.  It is important to pay particular attention to these warranties because if you breach them the employer could either withhold your payment or commence court proceedings against you for their losses caused by your breach. That will typically include the compensation sum (if that has already been paid to you) and their legal costs of initiating and conducting legal proceedings.

Typical warranties include:-

  • That you won’t breach the confidentiality agreements.
  • That you have not committed a repudiatory breach that would entitle your employer to dismiss you without notice for gross misconduct
  • That you have not already received an offer of employment.

If you have already received an offer of new employment it can be possible to negotiate out this warranty particularly if the Settlement Agreement is not the result of a hotly disputed or controversial issue.

How does the Settlement Agreement affect the restrictive covenants that were in my original contract of employment?

Restrictive covenants are usually reserved for more senior executives who are in possession of valuable confidential information, trade secrets or have strong links with the employer’s clients and customers. Sometimes the Settlement Agreement will ask the employee to reaffirm that they will abide by the restrictive covenants in their original contract of employment. Employers will often make a payment of an additional sum, usually between £10 and £100, in exchange for the employee’s reaffirmation.  If you are a senior executive with restrictive covenants this clause can sometimes be more important than negotiating the compensation payment itself.

I am disappointed with my reference what can I do?

Perhaps your employer has offered you a standard reference simply confirming the dates of your employment and your job title. You should probably not worry about this too much as nowadays the vast majority of employers give a standard reference along these lines. Because this sort of reference is so common prospective employers are not usually troubled by it nor assume that the employee has anything to hide. If you would like an enhanced reference you can ask your employer and they may agree.

My employer won’t give me a reference. What can I do?

Employers are not under any legal obligation to give a reference, only to give a reference that is fair, accurate and not misleading. Therefore if you are facing dismissal for misconduct your employer may be reluctant to give any reference at all. Your solicitor may be able to help you negotiate a standard reference however.

When does the agreement become legally binding?

When all of the parties have legally signed it. That means you, the employer and your solicitor. Until it is signed by all parties it is without prejudice and subject to contract. 

What can I do if my employer doesn’t pay my compensation even though the agreement has been signed by all parties?

You can bring a breach of contract claim in the civil courts or, if you are still employed and the compensation is under £25,000, a claim in the employment tribunal. In reality extremely few employers will refuse to pay the compensation payment as it is not in their interests to do so.  

Do I need a face to face appointment to deal with my Settlement Agreement?

That is not necessary. As long as you or your employer can email a copy of the agreement to us we can assist you by telephone. You should have the agreement in front of you during the call and allow between 30 to 60 minutes for us to discuss the agreement with you, advise you of its terms and take your instructions if you have any.

How quickly can you help me?

We can usually help you that same day or within 24 hours. If you ask us to enter negotiations with your employer on your behalf these can usually be completed within a matter of days. Contact us as early as possible.

I am unhappy at work and want to leave. How can I persuade my employer to offer me a Settlement Agreement?

It depends on what is making you unhappy. If it is bullying, harassment, discrimination or some other sort of unlawful treatment we can approach your employer on your behalf pointing out their breaches of employment law and suggesting a negotiated settlement. You may also be pleasantly surprised that our approach results in an improvement in your situation which allows you to continue at work but on a much happier footing.  

If you are unhappy because you are simply fed up at work and your employer has not done anything wrong or unlawful they will be much less inclined to offer a Settlement Agreement.

How to make contact

If you would like to speak to an employment solicitor about your options, then please call us or email us using the enquiry form below.

We can assist wherever you are based but we also have offices in Birmingham, Bedford, Derby, Leeds, Leicester, London, Manchester, Middlesbrough, Northampton, Nottingham & Sheffield.

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