Due to the coronavirus pandemic having a damaging impact on business across the UK, this has ultimately led to a strain on employee and employer relationships. When the employment relationship becomes strained, it may be best for both parties to consider ending the employment relationship cordially.

A settlement agreement is one option to end the relationship – this option can also be used to avoid any legal repercussion and costly tribunals.

What are Settlement Agreements?

A settlement agreement is a legally binding agreement between an employer and an employee which is typically used to end an employee and employer dispute, or to end the relationship on mutually agreed terms. Either parties can suggest entering into discussions of a proposed settlement agreement at any point of the employment relationship, although this is voluntary and neither party is obliged to partake in discussions.

A settlement agreement is generally used to end an employer/employee dispute, and aims to prevent the risk of a claim at an employment tribunal. An important feature of the settlement agreement is to waive the employee’s individual right to raise a claim at court or employment tribunal on any matters relating to the agreed terms within the settlement agreement.

For the settlement agreement to be legally binding, the below conditions must be met:

  • The agreement must be in writing
  • The agreement must relate to a particular complaint or proceedings
  • The employee must have received advice from a relevant independent legal advisor, such as a lawyer or a certified and authorised member of a trade union
  • The independent legal advisor must have a current contract of insurance or professional indemnity covering the risk of a claim by the employee in respect of loss arising from the advice
  • The advice must identify the advisor
  • The agreement must state that the applicable statutory conditions regulating the settlement agreement have been met.

Best Practice

An employer is not obliged to cover the entire cost of legal fees, however the employer will have to make a contribution to the legal advice if the employer is presenting the proposal. The independent legal advisor will aid the employee in gaining an understanding of the terms they would be agreeing to. The independent legal advisor will not typically advise whether the terms are good, nor will they typically advise the employee to go to employment tribunal to get a better outcome.

When arranging a meeting to discuss proposals of a settlement agreement, it is considered good practice to conduct the meeting face to face. This is widely referred to as a ‘protected discussion’ or ‘protected conversation’, and should be arranged at a reasonable time, giving both parties the opportunity to prepare ahead of the meeting.  Although there is no legal requirement to do so, employers could also consider giving the employee the opportunity to have a trade union representative or workplace colleague to attend the meeting to offer support, as this may be a difficult and unnerving time for the employee.

It is considered beneficial if both employers and employees can agree terms and conditions, rather than the terms being imposed by a judge at an employment tribunal. Both parties can agree to a dates and duties reference and an internal exit communication to be included within the settlement agreement terms, which would not typically be agreed with a judge.

Most settlement payments which equate to under £30,000 are tax free, if the payment is considered a form of compensation for the employment ending.

Settlement agreements can also include terms in relation to:

  • Termination
  • Compensation
  • Notice payments
  • Bonus payments
  • Pensions
  • Insurance

Contractual payments such as notice pay and holiday pay are subject to tax and national insurance deductions in the normal way.

Settlement agreements can specify that the employee be terminated either with their contractual notice, or from the date specified in the agreement. The details of any payments due to the employee, as well as the timing of these should be included in the written agreement.

It is recommended that a minimum period of 10 days is given to the parties to consider the proposed agreement. This is a reasonable timeframe allowing both parties to consider the proposed terms and to gain independent legal advice before any agreement is made.

Once the terms are agreed, if any claims have been made to the employment tribunal, these would need to be withdrawn, as the claim would ultimately be dismissed and the claim process would come to an end.

If the agreement is rejected and either party still wishes to resolve the despite, they would need to consider either arbitration (such as via ACAS) or to pursue an employment tribunal.

If the dispute goes to employment tribunal, section 111A of the Employment Rights Act 1996 states that offers to end the employment relationship under a settlement agreement can be made on a confidential basis; this means that it cannot later be used as evidence against an unfair dismissal claim at an employment tribunal. Any claims that include unfair dismissal on the grounds of whistleblowing, being a trade union member, or any protected characteristic under The Equality Act 2010, will not be protected under section 111A.

If we can help you with this or any other HR issue, please do not hesitate to contact a member of our HR Team at HR Services Scotland Ltd on 0800 652 2610 (select option 1 for HR).

For more information about the services that we provide at HR Services Scotland, please get in touch with us here.

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