14th Mar 2021

What are Settlement Agreements?

The COVID-19 pandemic has affected so many aspects of people’s lives, but it is also having a huge impact on employment. Countless people have already lost their jobs as a result of the pandemic often being made redundant (with many more predicted) because their employer is restructuring or having financial difficulties as a consequence.  

What is a settlement agreement?

A settlement agreement is a legally binding contract between an employer and an employee.  

It normally results in the employee agreeing to waive his or her employment rights against the employer and not pursue any claims in an employment tribunal or other court. In return the employee will usually receive a financial settlement, which will be set out in the agreement. 

When can a settlement agreement be used?

They are most commonly used to end employment on agreed terms or to resolve an ongoing (or potential) dispute in the workplace. 

Settlement agreements can be proposed by either an employer or an employee and can be offered at any stage of the employment relationship.

They are voluntary on both sides and neither party has to agree to it or enter into discussions about them.

Using a settlement agreement is an alternative to the employer going through what could be a long and drawn out process with an employee, for example where there are issues around performance or a redundancy situation– which can be time consuming, risky and stressful for both parties. 

What needs to be done and included?

For the settlement agreement to be valid and legally binding, certain conditions must be met. The main ones being: 

  1. The agreement must be in writing and signed by the employee; 
  2. It must set out the particular claims which the agreement is settling;  
  3. The employee must have received advice on the terms and effect of the agreement from an independent solicitor, or a certified and authorised member of a trade union; and
  4. That adviser must be clearly identified in the agreement and their advice covered by insurance.  

Usually there is a process of negotiation between the parties and/or their advisers to finalise, agree and sign off the settlement agreement. 

These discussions or negotiations are normally conducted on a “without prejudice” basis, or as part of a “protected conversation”. 

If the parties are unable to reach an agreement, the settlement discussions cannot usually be used as evidence or referred to in any employment tribunal or other court proceedings.   
What next? 

The Berwins employment team is highly experienced in advising individuals on the settlement agreements and also drafting them for employers, taking both through the process from start to finish. 

Mike Patterson is Head of Employment at Berwins

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