If an employee wants to end their contract of employment with an employer or vice versa and if both parties are agreeable to this, they may want to enter into a legally binding written agreement which sets out the terms of ending that relationship from both the employer and the employee’s perspective.
The agreement usually involves the employer offering a sum of money to the employee in return for ending their employment. This is called a settlement agreement and was formerly known as a compromise agreement.
It is possible to enter a settlement agreement to resolve a dispute and still to remain in the employment thereafter, for example the employer and employee may want to resolve a dispute about holiday pay using this agreement, but the most common type of settlement agreement is where the employee’s contract is terminated.
What is the benefit of entering into a settlement agreement?
If both parties agree to enter into a settlement agreement it allows them both a ‘clean break’ and the opportunity to know where they stand. It offers a quicker and cheaper alternative than going through an employment tribunal to resolve a dispute.
The agreement is also kept largely confidential so that parties cannot discuss the terms of their agreement with outside parties apart from specific exempted parties such as immediate family or legal advisors. This is contained within a confidentiality clause which is within the agreement.
How can an employer begin discussions with an employee about a settlement agreement?
If the employer wants to consider resolving a dispute by settlement agreement, the employer can make a settlement offer to an employee in writing or orally but best practice would always be to make any offer in writing so as to avoid misunderstanding, or make the offer orally followed up by a written letter setting out the details of the offer.
Contained within the letter from the employer should be the reasons as to why they want to offer a settlement agreement, for example if they would like to terminate the employee’s contract of employment because of performance issues this should be set out in the letter, and the financial sum of compensation offered to the employee should also be contained within the letter.
When taking part in any discussions – or when making the settlement offer in writing – the employer should also make it clear that this is a protected conversation. It is also possible for an employee to open discussions about the possibility of a settlement offer and they can do this by also writing a letter to their employer regarding this, although it is more common for the employer to begin a discussion about a settlement agreement.
What is a protected conversation?
A protected conversation is governed by section 111A of the Employment Rights Act 1996. It is an off the record, honest discussion between the employer and the employee about where they both stand.
These conversations are protected in that they cannot be used as evidence at a later date if, for instance, an employee were then to raise a claim at an employment tribunal. The benefit in having a protected conversation is that both parties can be frank with each other and, even if negotiations do not lead to a settlement agreement being reached, they do not have to worry about the discussions being used against them at a later stage.
An employer cannot rely on a protected conversation in cases of discrimination or in a situation where the employer acted improperly, for instance if they place undue pressure on the employee to accept an offer. The employer should therefore be reasonable and honest with the employee and should always give them time to think about the offer.
What is contained within the settlement agreement?
If it is agreed by both the employer and the employee that a settlement agreement is the best way forward, the next stage would be to draft the agreement itself.
This agreement can be drafted by solicitors. The agreement contains clauses which set out the various applicable terms.
If the settlement agreement was terminating the employment, a termination date would be inserted as well as details about the settlement offer. There would also be a clause whereby the employee renounces certain rights to claim. This would mean, for example, that an employee could not then go on to make a claim for unfair dismissal once they have entered into the settlement agreement. As discussed previously, there is also a confidentiality clause so that the terms of the agreement cannot be made public.
It is always also a mandatory requirement of any settlement agreement that the employee seeks separate advice on the terms of the agreement so that they can be fully advised about what they are signing. Further negotiations regarding the terms of the agreement may be required before the agreement is signed.
For further information regarding the content in settlement agreements see elsewhere on this website.
What if an agreement cannot be reached?
If the employer makes an offer to the employee to end the employment there is no obligation on the employee to accept this offer. It may be that, following negotiations, an agreement cannot be reached.
If that is the case, the employee continues in their employment. At that stage, the employer may want to consider following their disciplinary procedure in certain circumstances – if, for example, there are capability issues or conduct issues regarding the employee. This can be a lengthy process and the employer must ensure that they are acting reasonably and following the correct procedures depending on the issue concerned.
How can we help?
If you would like further information on resolving a dispute by settlement agreement – or if you require any other employment law advice – we are here to help.
If you are an employer and you want to make an employee an offer, we can guide you through the settlement agreement process and we can draft the agreement itself.
If you are an employee we can offer advice on how to invite an offer from your employers or – if you have been given a draft settlement agreement from your employers – we can provide independent legal advice about the terms of that agreement.
Note: This information was originally published on the Moray Employment Law website in May 2017.