Settlement Agreements and Compromise Agreements – What you need to know

A Settlement Agreement can be used to end a worker’s employment amicably in a way that avoids disadvantaging either the employer or the employee. It was introduced in the UK in July 2013 and took the place of the old Compromise Agreement. The two are quite similar in that both are legally binding and usually entail the employee receiving a financial settlement and an agreed form of reference. From the employer’s perspective these agreements allow them to terminate the worker’s employment without worrying about facing a tribunal.

The key difference between a Settlement Agreement and a Compromise Agreement is that the latter provided a limited degree of protection in some respects. This was because, while the principle of “without prejudice” applied it only did so to pre-termination discussions relating to existing employment disputes. Without prejudice is a legal principle preventing discussions from being brought up in court. It helps to facilitate open discussion without either party worrying their words being used against them later in court. A weakness of the Compromise Agreement was that only existing disputes were covered, which tended either to hamper discussions between employers and employees or to cause issues later in tribunals.

The Settlement Agreement introduced the concept of “confidential” pre-termination discussions, which prevents talks from being used as evidence in unfair dismissal claims, even in cases where an existing dispute does not exist. However, it should be noted that confidentiality does not apply in all cases. If an employee is fired for an unfair reason, such as whistleblowing, trade union membership or asserting their statutory rights as a result of entering into a Settlement Agreement, then the circumstances can be brought up at tribunal. Also excluded are cases brought under discrimination, harassment, victimisation or breach of contract. In addition, if a tribunal considers that improper behaviour by one of the parties has taken place it might also allow the previous discussions to be heard at tribunal. Examples of improper behaviour would include bullying and intimidation, physical assault or putting undue pressure on a party, such as pressurising an employee to make a decision on an offer. ACAS, the employment conciliation body, recommends that employees be given 10 calendar days to consider offers, unless the parties mutually decide to fast-track discussions.

In order to be legally binding the Settlement Agreement must satisfy certain conditions. Details of the specific complaint or proceedings must be included and the document must state that applicable statutory conditions have been met. If all relevant parts are not included the agreement will not be valid – further information about the parts that must be included in the Settlement Agreement can be found here. Where an employee is a senior member of the company, such as a director, shareholder or office holder, a Settlement Agreement – Director should be used. This contains additional clauses dealing with directorships, shareholdings and bonus/commission payments together with confidentiality and restrictive covenants.