Settlement Agreements V Compromise Agreements

Settlement Agreements came into effect on the 29th of July 2013.

From 29 July 2013Compromise Agreements have been replaced by Settlement Agreements.

Settlement Agreements are, on the face of it, the same as Compromise Agreements, albeit with a new name; the same conditions need to be satisfied for them to be legally binding and they have the same effect of terminating the employment relationship whilst compromising an employees’ employment rights.

Settlement Agreements are recognised by statute and they are an exception to the general principle set out in all employment legislation that an individual cannot contract out of their statutory employment rights. They are the only way in which an employee can contract out of their rights under employment law. They enable employees to agree to compromise their own statutory employment rights in return for compensation. The main employment rights most often compromised relate to withdrawing an existing, or subsequently refraining from bringing a claim to an Employment Tribunal and/or the courts.

A Settlement Agreement (formerly known as a Compromise Agreement) is a legally binding contract between an employee and employer which is used to end an employment relationship on agreed terms. In return, the employee generally receives a financial settlement and an agreed form of reference.

In other words, a Settlement Agreement is an agreement which enables an employee and the employer to agree that the employee will not bring a claim to the employment tribunal and/or the courts against the employer about the issues covered in the agreement in return for a compensation payment. Without a Settlement Agreement if the employee and employer end their relationship, the employee has the right to take a case to the employment tribunal and/or courts if there are grounds to do so.

There is a range of scenarios in which Settlement Agreements are used. Settlement Agreements can be used to end an employment relationship on agreed terms. They can also be used to resolve an ongoing workplace dispute. Settlement Agreements are often used to safeguard the interests of both employer (who gain certainty they won’t face a tribunal case on any of the grounds covered by the agreement) and employee (who gets a payment and avoids a dismissal in their employment history).

Settlement Agreements can be proposed by either an employer or an employee and they are voluntary, the parties do not have to agree to them or enter into discussions about them if they do not wish to do so. Equally the parties do not have to accept the terms proposed to them.However,once a valid settlement agreement has been signed, the employee will be unable to make an employment tribunal claim about any type of claim which is listed on the agreement.

Prior to 29th July 2013, Settlement Agreements were known as Compromise Agreements.

In practice, there is little difference between a Compromise Agreement and a Settlement Agreement. The main difference between the two is that Compromise Agreements provided limited protection as the “without prejudice” principle applies only to pre-termination discussions entered into between an employer and an employee where there is an existing employment dispute between the parties. Without prejudice is a common law principle which prevents statements (written or oral) made in a genuine attempt to settle an existing dispute from being put before a court as evidence against the interest of the party which made them.

In other words, in order to benefit from the without prejudice protection there must be an existing employment dispute between the parties before pre-termination discussions take place; without a formal dispute the without prejudice principle does not apply. In fact if no dispute exists pre-termination discussions are not covered by the without prejudice principle and they can be referred to in a subsequent tribunal claim.

Settlement Agreements introduced the concept of “confidential” pre-termination discussions. As stated above, to benefit from the without prejudice protection so that such discussions cannot be used in any subsequent tribunal proceedings, there has to be an existing employment dispute before the discussions take place. Since there are often occasions where either the employer or the employee want to enter into pre-termination discussions where there is no existing dispute, the concept of “confidential” pre-termination discussions have been introduced with the intention of encouraging employers and employees to enter into settlement agreements.

Under the new Settlement Agreements pre-termination discussions where there is no existing dispute are confidential and cannot be used as evidence in unfair dismissal claims. Thus, employers and employees are now able to enter into pre-termination discussions without fear of such discussions being used as evidence in subsequent employment tribunal proceedings, in circumstances where there is not an existing dispute.

Pre-termination discussions/negotiations are defined as “any offer made or discussions held, before the termination of employment in question, with a view to it being terminated on terms agreed between the employer and the employee”. Under the new Settlement Agreements such discussions/negotiations are kept confidential whether there is, or is not, an existing employment dispute, or where one or more of the parties is unaware that there is an employment problem. Furthermore where there is an existing dispute between the employer and employee, both the ‘without prejudice’ and new statutory confidentiality provisions will apply, as the new “confidential” and the existing “without prejudice” rules run concurrently.

To obtain the new “confidential” protection, pre-termination discussions must only be used in circumstances involving a “straight forward” unfair dismissal claim. Pre-termination discussions are not protected if the employee has been dismissed for an automatically unfair reason. Employees are not prevented from bringing claims in relation to ‘automatically unfair’ dismissals, such as for whistleblowing, trade union membership or asserting a statutory right, by virtue of having entered into a Settlement Agreement. The confidentiality provisions also do not apply to grounds other than unfair dismissal, such as claims of discrimination, harassment, victimisation or claims relating to breach of contract.

Furthermore, the “confidential” protection also does not apply where there is “improper behaviour” by one of the parties, in which case the tribunal will allow evidence to the extent that it considers it “just”. Improper behaviour, by either an employer or employee, includes all forms of harassment, bullying and intimidation; physical assault or the threat of physical assault; victimisation; discrimination; and putting undue pressure on a party, which can include not giving an employee sufficient time to consider an offer.

Consequently, in the instances above, an employee can use the contents of pre-termination discussions as evidence to support their claim.

To assist employers, employees and their representatives understand the implications of the changes introduced to the Employment Rights Act (ERA) 1996 in relation to negotiation of settlement agreements; ACAS have produced a Code of Practice on Settlement Agreements (“the Code”). The Code is statutory, but failure to follow it does not entitle an employee to bring a claim for this reason alone.

In order for a Settlement Agreement to be valid it must comply with stringent statutory conditions. There are strict and well-defined requirements to be fulfilled to ensure that a Settlement Agreement is valid. A correctly structured Settlement Agreement will be legally binding on both parties.

The following conditions must be satisfied in order for the Settlement Agreement to be valid. If these conditions are not satisfied then the Settlement Agreement is not legally binding:

·         The agreement must be in writing.

·         The agreement must relate to a particular complaint or proceedings

·         The employee must have received independent legal advice on the terms and effect of the proposed agreement

·         The agreement must identify the adviser

·         The adviser must be covered by a suitable insurance policy. The policy must cover the adviser against the risk of a claim for losses because of the advice that has been given

·         The agreement must state that the applicable statutory conditions regulating the settlement agreement have been met.

The Code requires that employees should be given a reasonable amount of time to consider the proposed conditions of the agreement and specifies a minimum of 10 calendar days unless the parties agree otherwise.

 

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For more information on Settlement Agreements and to purchase a compromise agreement template-settlement agreement template please visit: www.thelegalstop.co.uk

Compromise Agreement

A Compromise Agreement (also known as “Termination” or “Severance Agreement”) is an agreement which enables an employee and the employer to agree that the employee will not pursue a statutory claim or claims against the employer in return for compensation.

Compromise Agreements are recognised by statute and they are an exception to the general principle set out in all employment legislation that an individual cannot contract out of their statutory employment rights. They are the only way in which an employee can contract out of their rights under employment law. They enable employees to agree to compromise their own statutory employment rights in return for compensation. The main employment rights most often compromised relate to withdrawing an existing, or subsequently refraining from bringing a, claim to an Employment Tribunal and/or the courts.

Compromise Agreements are becoming increasingly common. They are often used to safeguard the interests of both employer and employee redundancy situations. In these situations it is common practice to offer a compensation payment (also known as “Ex-gratia Payment”) above and beyond the employee’s statutory redundancy payment.

Compromise Agreements are most commonly used:

  •  To settle an existing claim an employee might have against the employer
  • To prevent an employee from claiming before an Employment Tribunal and/or the courts
  • To avoid legal challenge in redundancy situations

Provided that the Compromise Agreement is legally binding once the agreement is signed, the former employee cannot subsequently lodge a case with an Employment Tribunal or the courts. That is a major plus for the employer. In return, the employee receives an ex gratia payment and both parties agree to keep the terms of the agreement secret.

In order for a Compromise Agreement to be valid it must comply with stringent statutory conditions. There are strict and well-defined requirements to be fulfilled to ensure that a Compromise Agreement is valid. A correctly structured Compromise Agreement will be legally binding on both parties.

The following conditions must be satisfied in order for the Compromise Agreement to be valid. If these conditions are not satisfied then the Compromise Agreement is not legally binding:

  • It must be in writing
  • It must clearly identify the complaints being settled. The Agreement must specify what specific claims the employee is agreeing not to pursue
  • The employee must have received independent legal advice
  • It must be signed by a qualified adviser who must have properly advised the employee of the statutory employment rights he has agreed to compromise
  • The adviser must be covered by a suitable insurance policy. The policy must cover the adviser against the risk of a claim for losses because of the advice that has been given
  • The agreement must contain a statement to the effect that the conditions regulating compromise agreements have been satisfied

Compromise Agreements are generally marked “without prejudice and subject to contract” to prevent an employee subsequently using evidence of an offer before an Employment Tribunal or court, should an agreement not be reached between the employer and the employee.

N.B. It is a common mistake to think that, where any payment is made on termination of employment, it is not taxable unless it exceeds £30,000.

The taxation of payments made on termination of employment depends on the type of payment made to an employee. If a payment or benefit is an entitlement under the contract of employment or the payment or benefit derives from the employment, it will constitute employment income and will be subject to tax. If a payment or benefit is not employment income, it is not taxable. Thus, if a termination payment and the value of any post-termination benefits is not taxable, the first £30,000 will be tax free.

Under a Compromise Agreement an employee receives all that is due to them by way of salary and benefits up to the termination date. A payment by way of ‘compensation’ is also made to the employee. In return for this the employee agrees not to bring any claims against the employer whether through the Employment Tribunal or the courts. Effective use of Compromise Agreements helps to prevent lengthy, costly and time consuming litigation by providing the parties with a clean break.

For a fully comprehensive Compromise Agreement, suitable for settling the claim of any employee please visit: http://www.thelegalstop.co.uk/Employment/Compromise-Agreement.html