What is a Settlement Agreement?

25 February 2021

A Busy Office
Man sitting quietly and pondering a Settlement Agreement

What is a Settlement Agreement?

1. Settlement Agreements

Formerly known as Compromise Agreements, Settlement Agreements are documents which set out the terms and conditions agreed by employer and employee when they agree to settle a potential employment tribunal claim (or claims) or other court proceedings and part company on certain agreed terms. Under the terms, the employee surrenders any right to bring any claims against the employer. Settlement agreements can also be used to terminate employment and can settle an ongoing claim being brought in a court or employment tribunal.

Either the employee or employer can suggest a settlement agreement.

2. What happens if you don’t sign a Settlement Agreement?

If an employee does not sign a settlement agreement or simply rejects it, employers can choose not to follow up with any further action and continue with the employment relationship unchanged. However, depending on the reason for the settlement offer, this is unlikely to be the best way of running the business and keeping staff motivated and engaged. 

Offers of a settlement agreement may often follow, or arise during, a performance management or disciplinary procedure  

It follows then that if an employee refuses to sign such an agreement, disciplinary proceedings may well follow which could be disruptive and expensive for the employer and potentially risky for the employee.

3. What happens at a settlement meeting?

Employees have no cause to be nervous about what happens at a settlement meeting. It is normally the employer who suggests the meeting. There should be clarity about the reasons for making the offer and be prepared to answer likely questions that may follow in discussion. A meeting with the employee, or a series of meetings, provides a good opportunity to clarify exactly what is being offered and to discuss any questions. A meeting also provides the employee with an opportunity to make a counter offer if desired. 

Ideally, meetings should be held on a day and at a time that is convenient to both parties. The number of meetings needed and the time they take may depend on the nature of the problems being discussed.

At the start of any such meeting it is good practice to make sure that those involved are made aware that any discussions about the proposed settlement agreement are likely to be inadmissible in relevant legal proceedings.

It should also be made clear that the discussions at the meeting, and any later discussions about a settlement that may follow, will have no bearing on any disciplinary or performance management procedure in the event that an agreement on settlement is not reached. 

The discussion process is voluntary and either party is free to decide that they do not wish to enter into discussions, or that they no longer wish to continue the process at any time. 

4. How long does a Settlement Agreement last?

A settlement agreement is a contract dealing with a particular issue. A settlement agreement will last as long as is required to deal with its components. There might be certain stages taking place within the agreement itself e.g. when to return a company car or phone, participation in the year-end bonus etc. Certain parts of the contract will last longer e.g. obligations of confidentiality might last up to 5 years or non-competing (i.e. Starting work for a direct competitor) requirements may last for a few months.

5. Can a Settlement Agreement be rescinded?

Yes, a settlement agreement can be rescinded - generally, an employer can withdraw a settlement offer at any stage before a binding settlement agreement is signed by the parties. Also, the employee can have a change of mind before signature. 

Otherwise after signature, given that a compromise agreement is a contract the normal rules apply and such an agreement could be rescinded if, for example, a party to the settlement agreement lacked capacity (for example, the party has a mental disability which rendered them incapable of understanding or consenting to the agreement), or a mistake has been made about a fundamental matter or which makes it impossible to perform the settlement agreement, or there has been fraud or a misrepresentation of a material fact in certain circumstances.

6. What happens if you breach a Settlement Agreement?

 If any provision of a settlement agreement is breached or not honoured, for instance, if an employer does not pay the employee the compensation set out in the agreement, or an employee fails to abide by an agreed and legally enforceable confidentiality clause, then the remedy is usually to claim breach of contract and damages in the County Court.

23rd February 2021

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