Settlement Agreements – What are they and why might you need one?

Settlement agreements are a legally binding document, previously known as a compromise agreement. Such documents are often used to confirm the details of a settlement reached in a dispute between two parties.

In an employment setting, a settlement agreement will be entered into where an employee (current or former) agrees to waive or settle a claim or potential claim against their employer, normally in return for financial compensation. That compensation may be called a termination payment or damages payment.  A settlement agreement will normally (although not always) bring the employment relationship to an end.

You may be offered a settlement agreement to settle a dispute arising from a claim of unfair or constructive dismissal, discrimination, harassment or any other issues around employment contracts including the termination of employment. A settlement agreement must be entered into voluntarily and to ensure that the employee is properly advised, it is mandatory that they obtain independent legal advice prior to entering into a settlement agreement. 

A settlement agreement will also contain other provisions which govern what both parties can and cannot do and this will often include confidentiality clauses.  The agreement may preserve an employee’s obligations under restrictive covenants or even impose new restrictive covenants, these are sometimes called post-termination restrictions. For example, a common restrictive covenant will be a non-compete clause where the employee cannot undertake work for a competitor or set themselves up in competition for a certain period of time. You may need specialist advice about whether your restrictive covenants are enforceable or not. Other common terms contained in a settlement agreement deal with references, the return of company property, outplacement support, pension and benefits. 

It is important for all parties to understand that entering into a settlement agreement is entirely voluntary. There is very often a process of negotiation whereby both sides make offers and counter offers to reach a mutually acceptable settlement. These discussions will take place on a ‘without prejudice’ basis which means that any statements made during the discussions cannot later be used in a Court or Tribunal as evidence. 

An employee signing a settlement agreement will be waiving their right to bring legal proceedings against their employer and therefore, in order for the agreement to be valid, the individual must take legal advice. The settlement agreement must also be signed by an independent legal adviser. The agreement will not be valid if this step has not been taken.

Hibberts can act as your legal adviser and our experienced settlement agreement solicitors will review the terms of the document and help you understand your options, the merits of any claims and any potential risks or consequences that may result. 

Hibberts can also act on behalf of employers needing advice about termination of employment. We can assist you throughout the process including drafting settlement agreements and accompanying documentation for you and guiding you step by step through the process. 

We can also negotiate on your behalf with the other party, to ensure that your interests are protected and that you obtain a positive outcome.  

Both parties should consider the following when entering into negotiations:

1. How strong is each case;
2. The compensation package offered versus what could be achieved if the matter went to Court or Tribunal;
3. What the options are if you do not enter the settlement agreement;
4. If the employment is to continue, what measures could be put in place to ensure there is a positive working relationship moving forward;
5. The stress and costs of legal proceedings. 

As certain statutory employment rights and claims can only be waived or settled by way of ACAS Early conciliation or a settlement agreement, employers will usually make a contribution towards the cost of independent legal advice.

If you would like advice on settlement agreements, as an employee or employer, please contact our Settlement Agreement Solicitors.