Settlement agreements play a crucial role in employment law whether they are used as a means to bring the employment relationship to an end or to settle a claim once employment tribunal proceedings have been issued. Unlike litigation, settlement agreements offer flexibility in crafting solutions that meet the unique needs and interests of both parties.
In this article, we will explore the key aspects of settlement agreements, their purpose, and how they impact both parties involved.
A settlement agreement is a legally binding contract entered into voluntarily by both the employer and employee. It typically occurs when an employment relationship is being terminated or when a dispute arises. The agreement outlines the terms and conditions agreed upon by both parties, providing a resolution to the issues at hand.
A settlement agreement must comply with the following requirements in order to be legally binding:
Firstly, they enable employers and employees to reach a mutually acceptable resolution thereby avoid the uncertainty and cost associated with prolonged legal battles. It allows for a timely resolution, saving time, money and stress. Unfortunately, it takes on average 12 to 24 months for a case to proceed to a final hearing before an Employment Tribunal. This lengthy timescale is generally in neither parties interest.
Additionally, settlement agreements provide a level of confidentiality, protecting both parties from public disclosure of the details of the dispute, the terms of and the existence of the agreement. A settlement agreement also provides a means for employees to secure a financial settlement or other beneficial terms when leaving their employment.
Unlike litigation, settlement agreements offer flexibility in crafting solutions that meet the unique needs and interests of both parties. It can include an agreed reference, an apology, non-disparagement clauses, or even future cooperation possibilities.
A comprehensive settlement agreement typically includes several key elements. These may include:
As noted above, to ensure the settlement agreement is valid, both parties need to enter into it voluntarily and with full understanding of its implications. Employees are required to seek independent legal advice before signing the agreement. It is common practice that employers make a contribution to the employees’ legal fees so that they can take advise on the agreement. This contribution can vary between employers and the issues involved.
Negotiations around settlement agreement are usually undertaken on a ‘without prejudice’ basis or during a ‘protected conversation’. This provides open communication between the parties with the aim to find a mutually agreeable outcome. Negotiations may centre around the monetary sum(s) payable under the agreement, the wording of a reference or the release or otherwise from restrictive covenants.
Settlement Agreements can be a valuable tool for resolving disputes efficiently and confidentially. Once a settlement agreement is reached, it brings closure to the dispute. It provides control to both parties rather than leaving a decision in the hands of an Employment Tribunal. Both parties can move forward, focusing on their respective goals and avoiding any prolonged emotional or financial strain.
Our Employment Team is experienced in advising on and negotiate the terms of a settlement agreement for all levels of seniority. The Team also has a wealth of experience in advising employers on the use of settlement agreements, the drafting and negotiating the terms of a settlement agreement.
The above is meant to be only advice and is correct as of the time of posting. This article was written by Alex Pearce, Senior Associate in the Employment Team at Pinney Talfourd LLP Solicitors. The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. Specific legal advice should be taken on each individual matter. This article is based on the law as of June 2023