Frequently Asked Questions
Below are some examples of questions that are often asked by employees/employers in relation to Settlement Agreements
1. Is a Settlement Agreement the same as a Compromise Agreement?
Yes. In July 2013, the name compromise agreement was changed to settlement agreement. The reason for the change was because:-
“[settlement agreement] more accurately describes their content and will help to avoid any party refusing to sign an agreement on the grounds that they do not want to be seen as ‘compromising’. We also believe that ‘settlement agreement’ is a more widely understood term, being used in the treatment of contract claims.
2. Is an employee required to obtain legal advice in relation to their Settlement Agreement?
Yes. A settlement agreement will mean that the employee waives all of their rights to bring a claim. This puts the employee at risk of giving up rights that they may not fully understand. To safeguard against this, an employee is required to seek independent legal advice about the terms and effects of the settlement agreement.
There is no requirement for an employer to seek legal advice.
3. Is there a legal requirement for the employee’s solicitor to have signed the agreement?
No. Although the legal adviser needs to be identified in the settlement agreement, there is no legal requirement that the solicitor signs it.
In reality, most settlement agreements include a requirement that the adviser signs a certificate confirming advice has been given to the employee.
4. Are these agreements used only on termination?
No. Usually, a settlement agreement will record the termination of someone’s employment, however, a settlement agreement can be used to cover other situations. For example, an employee can bring a claim of discrimination while still employed and certain claims can arise even when there was never an employment arrangement. Settlement agreements can be used in these situations.
Be careful though. Certain tax exemptions usually only apply to compensation paid at the end of an employee’s employment.
5. Can future claims be settled in Settlement Agreements?
Yes. It is now widely believed that settlement agreements can be used to settle future claims, even if the employee is not aware of them. However, to do this it is important to use very clear wording.
6. Other than monetary payments, what can these agreements cover?
Although the amount of money is often the most important part for employees, there are other important things that can be agreed, such as:-
- Contribution to legal fees
- Outplacement support (help with finding another job)
- A detailed reference
7. What does ‘without prejudice’ mean?
A settlement agreement will usually be headed “without prejudice”. This means that the employer and employee can discuss proposals ‘off the record’ without worrying that what they say may be used in evidence against them.
However, once signed by all parties, the settlement agreement usually loses its ‘without prejudice’ status.
8. Is a Settlement Agreement the entire agreement?
Yes. Generally, a settlement agreement will include a clause to confirm that the document is the ‘entire agreement’ between the parties. If you think that you have agreed something but it is not contained in the settlement agreement, then it may not be enforceable.
9. Is a Settlement Agreement the only way to settle an employment dispute?
No. Employees can settle claims using ACAS, usually in the form of a COT3 agreement.
10. How is a Settlement Agreement enforced?
If either party believes that the other party has breached the settlement agreement, they can bring a claim in the civil courts or the employment tribunal. Interestingly, a claim in the employment tribunal can only be brought if the settlement agreement was entered into before the end of the employee’s employment.
Settlement Agreement clauses which aim to exclude liability for future claims – are these allowed?
Settlement agreements can sometimes contain ‘catch-all’ clauses in the sense that they aim to waive all future claims that have not yet arisen, whether they were in the parties’ contemplation or not.
Here is an example:
‘You specifically acknowledge that there may be claims which at the time of this Agreement are not contemplated on the facts known to You but nevertheless those claims are going to be released by this Agreement and the settlement is of all claims whether contemplated or not.’
The difficulty with these types of clauses is that some commentators have interpreted case law to mean that it is not possible to waive future claims. However, in Hilton UK Hotels Ltd v McNaughton, Lady Smith stated that ‘whilst parties may agree that a compromise agreement is to cover future claims of which an employee does not and could not have had knowledge, to do so effectively, the terms of their agreement must be absolutely plain and unequivocal’.
In addition, in the Royal National Orthopaedic Hospital Trust case it was said that there appears to be no reason why, as a matter of public policy, a party should not contract out of some future cause of action. Although it was declared that this would require ‘extremely clear words for such an intention to be found’.
Despite the above comments, we still do not have an example of language which has passed the above test. In Hilton, the judge found that the language was not sufficiently clear to exclude future claims. Although the Royal National Orthopaedic Hospital Trust case concerned COT3s, Lady Smith took the view that there was no reason why the same principles about waiving future claims should not apply in the case of settlement agreements as well. As a result, clauses of the above type are nevertheless widely used.
It seems that the consensus is for the clause to be both clear and specific.
What is a Settlement Agreement?
A Settlement Agreement is a written document which an employer and employee sign and enter into which settles (or compromises) the employee’s right to pursue various employment law claims which the employee has or may have against their employer (or former employer). In exchange for entering into this, the employee usually receives a payment, known as a Termination Payment or an Ex-Gratia payment (the first £30,000 of which is usually free of both tax and national Insurance contributions).
What do I do if I have been offered a Settlement Agreement?
If you have been given a Settlement Agreement then you should seek independent advice from a specialist employment law solicitor. This is one of the requirements to make the agreement legally binding. At Partners Employment Lawyers we are experts in this area and are more than happy to assist. Please call us to arrange an appointment and we can take you through the process and terms step-by-step.
How much will the appointment cost?
It is typical that employers agree to make a contribution toward the employee’s legal fees in obtaining advice on the terms of a Settlement Agreement. The exact amount may vary in each case. The contribution is usually stated within the agreement and is payable directly to the legal adviser. We will advise you as to the likely costs involved, in the majority of cases these will be covered by the contribution, however, we will always inform you if we believe our costs may exceed the contribution from the employer.
What about the actual appointment?
We can arrange the appointment at a time to suit you. This may be in person or over the telephone. Generally appointments take around an hour in which we take background information about your circumstances and then advise you on the actual terms of the Settlement Agreement and answer any questions you may have.
Please bring with you the actual Settlement Agreement and any other documents you believe are relevant such as your contract of employment. We also require some ID documents including a passport and/or driving license together with proof of address with a bank statement or utility bill.
Will I still receive my bonus if I sign a Settlement Agreement?
This will depend on the terms of your contract and the Settlement Agreement wording. Most Settlement Agreements are in ‘full and final settlement’ and as a result usually once you have signed you will not be entitled to any additional payments such as your bonus. We would carefully check the wording and advise you of this.
What if I am not happy with the agreement?
There is no legal obligation on you to sign a settlement agreement if you are not happy with it. We always stress that you should only enter into Settlement Agreements on terms that you are happy with. We can discuss other options if you are not happy with what is on offer or if amendments are required. We believe the decision should be based on balancing the claims you may have against your employer against the compensation being offered, while taking into account the realities of suing your employer, such as legal fees, time delay and uncertainty. Our role is to make you fully aware of the terms of the document so that you can make the decision to enter into it or not.
This note does not constitute legal advice and is intended as general guidance only. If you would like further information or would like to arrange a meeting please email firstname.lastname@example.org or call 07809 694400.
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