Leaving service with a settlement agreement
22 March 2019
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The vast majority of an employee’s rights are based on what is termed, statute law. They are rights that protect employees despite what is written in their employment contract. Employees and their statutory rights are protected by making it illegal for employers to contract out of those rights.
As an example, an employee with two or more years of service has the right not to be unfairly dismissed from their role. This right arises because of section 94 of the Employment Rights Act 1996. This right is what principally requires employers to undertake training and coaching for underperforming employees and to carry out investigations where an employee is accused of misconduct. Because dismissing an employee without a fair reason and without a fair procedure is likely to result in compensation payable to the employee.
As it is not possible to contract out of the unfair dismissal right, even if an employee is willing to agree to waive it in exchange for a payment, that agreement will not be legally valid. That is, unless the contract meets the specific legal requirements to be a “settlement agreement”.
A settlement agreement is a special kind of contract which allows employers and employees to agree a payment in exchange for the employee giving up some or all of their rights.
There are several prescribed requirements for a valid settlement agreement but the key ones are:
The agreement must relate to specific allegations but it is not necessary for any complaint to have been raised with an employment tribunal. Equally, it does not require an employee to raise a grievance making a complaint. The complaints that can be settled do not have to have actually occurred at the time of the agreement but they must be ones that the parties can envisage. This means that the settlement agreement can cover complaints that may occur in the future.
The agreement must be in writing. This helps to give certainty to what the employee is giving up and what the employer will pay. It is important that the agreement includes a written statement about the facts of the disagreement between the employer and employee so that it is clear what complaint is being settled.
The employee must receive independent legal advice on the agreement. This advice must cover the terms and effect of the agreement. This is[AA1] to protect the employee and ensure that they fully understand what they are agreeing to.
The requirement for the employee to take legal advice is very important and it is worth considering this when deciding whether to offer a settlement. Because the employee must take advice, it may be that when they do, they realise that they have other claims against their employer and so a settlement can become impossible or a lot more expensive for the employer.
There is also a cost for taking independent legal advice and the general rule is that the employer will pay a contribution towards the employee’s legal fees. This is because without taking advice, the parties cannot agree a binding agreement and so the employer cannot be released from liability.
As settlement agreements can be used to resolve disputes before they arise, it is possible to use them to exit employees without going through a full procedure. Although this requires the employee’s agreement to the terms, it is always sensible to consider whether agreeing a settlement may be a sensible alternative to dismissing an employee.
If you would like advice on whether to offer a settlement agreement, or assistance with drafting one, please contact a member of the 3HR employment team.
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