Settlement agreements operate in a similar manner to compromise agreements.  

Both parties negotiate to agree the terms to settle the employment dispute(s). The terms of that ‘agreement’ are incorporated into the settlement agreement.

Settlement agreements can be used to ratify an agreement concerning a dispute and employment may continue. More commonly settlement agreements are used to clarify what is agreed to ‘settle’ the dispute and to set out the terms by which the employment relationship will be bought to an end by the mutual agreement of both parties.

Settlement Agreements are Legally Binding

Where a settlement agreement is used, the employee effectively agrees to ‘forsake’ the right to progress a claim to an employment tribunal. In return the employee receives what was incorporated in the settlement agreement. Consequently it is of paramount importance that the settlement agreement is carefully drafted to incorporate to set out what is agreed and intended by both parties.

The claims which are ‘forsaken’ are limited to those incorporated in the settlement agreement. If a settlement agreement is drafted well, then once it becomes legally binding, both parties must comply with the obligations detailed in it or face legal consequences. There are also only very limited avenues for one party to challenge and re-open the dispute.

What are the Advantages of a Settlement Agreement?

Settlement agreements are an alternative means of settling a dispute to pursuing the matter via an employment tribunal or county court. Once a legally binding agreement is reached, both parties are bound by the terms of the settlement agreement. A settlement agreement therefore gives certainty to both parties as to the outcome.

Settling a dispute via a settlement agreement can be cost effective for both parties. Particularly if the costs are compared to progressing the matter via an employment tribunal or county court. Further reaching a legally binding agreement via a settlement agreement can be comparatively swiftly executed.

Where a matter does progress via litigation, the proceedings and final judgement are placed in the public domain. Employment Tribunal decisions are for example available via a search of the internet. Both parties may wish to avoid the dispute getting into the public domain and the reputational damage that may entail.

Business owners in some sectors may have a further consideration. Some competitive tender bids preclude firms from the tender process if an award is made against the employer, at an employment tribunal. For this reason some employers may wish to minimise the risks of an unfavourable outcome, by avoiding a dispute progressing to an employment tribunal.

With a settlement agreement, both parties have the option of obtaining additional rights which are not within the jurisdiction of the judge to award. For employees this may include a reference. For the employer it may include certain protections for example in regard to confidentiality. Settlement agreements enable the employer to negotiate such additional rights and restrictions to protect the business and for these to be incorporated into the settlement agreement. There is no option to incorporate additional terms or protections if the dispute is settled via an employment tribunal hearing.

Settlement Agreements Limitations

If a dispute is settled via am agreement, both parties can agree to incorporate ‘non disclosure’ clauses into the agreement. Note there are limits on the enforceability of non disclosure agreements. This is particularly applies in the circumstances where the agreement is being used to ‘silence’ acts of wrongdoing or whistleblowing allegations.

A judge may have limited jurisdiction to make some awards or findings. If a settlement agreement is used, no such limits apply. Therefore settling a dispute via a settlement agreement offers both parties greater flexibility to agree the terms of the agreement.

What are the Costs of a Settlement Agreement?

For a settlement agreement to become legally binding, the employee must receive independent legal advice on the terms. The costs of such advice is normally funded by the employer. The settlement agreement will also need to be negotiated and the terms of the settlement agreement drafted and the final terms agreed.

HR First provides help to employees and employers with settlement agreements.

On occasions it is not possible for an employer and employee to reach an agreement. In this case HR First provides support via our employment tribunal representation service.