A settlement agreement is a legally binding contract made between an employer and their employee. They are usually offered to an employee when their employment is being terminated but they can also be used if there is ongoing dispute to be resolved, even if the employee is not leaving their job.

Legal requirements of a settlement agreement

There are a number of requirements under legislation, in particular Section 203 of the Employment Rights Act 1996, that must be met for the agreement to be legally binding:

1. The agreement must be in writing
2. The agreement must relate to particular proceedings or a particular complaint
3. The employee must have received advice from a relevant independent adviser as to the terms and effect of the proposed agreement, and the impact it would have on their ability to pursue that complaint or proceedings before an employment tribunal
4. The agreement must identify the adviser and their advice must be covered by insurance
5. The agreement must state that the conditions regulating settlement agreements under the Employment Rights Act are satisfied

Contents of a settlement agreement

From an employee’s point of view, the most important part of the settlement agreement will likely be the termination payments. For example, these can include your notice pay, a tax-free sum, your statutory redundancy entitlement, holiday, bonuses, and other benefits. How much you will be entitled to under your settlement agreement will vary depending on a number of factors. This will be discussed in more detail in a future blog post.

As a condition of receiving these payments, the employee must not pursue certain statutory claims against the employer in the tribunal or the courts. The agreement will also typically contain terms that require employees to return any company property, keep the terms of the agreement confidential and not make any derogatory comments about their employer. The latter of these terms will often be reciprocal so that the employer has the same obligations to the employee.

Considering and negotiating a settlement agreement

The ACAS Code of Practice states that employees should be given a minimum of 10 calendar days to consider a settlement agreement presented to them and, although this is not binding, employers would have to provide an explanation to justify why they would not adhere to this. During this time, employees may seek to negotiate the terms.

Failure to allow sufficient time to consider the agreement and take advice may mean that the employee can refer to the discussions and negotiations in evidence during a claim for unfair dismissal.

All of the terms in the final agreement should be agreed by both parties before signing. Once the agreement is signed by all parties it becomes legally binding and all other discussions (whether oral or written) regarding the terms of the agreement will typically fall away. This is why it is very important to make sure that everything is dealt with in the settlement agreement.

If you have been given a settlement agreement and need advice, please contact Kezia Brown by email or on 01494 893504.