Employment Tribunal risks of settlement agreements

There is no magic wand that miraculously makes disputes disappear.

But the nearest thing to this in HR and Employment Law is a settlement agreement.

In one document, an employee agrees to waive their rights to bring legal claims against their employer. In return they receive a discretionary severance payment.

Even if the parties do not reach an agreement, there are some circumstances where the negotiation discussions cannot be used as evidence in legal proceedings by either party to support their cases.

This may sound a perfect solution, but settlement agreements are not without their risks and costs. If employers do not tread carefully, they can find themselves in trouble.

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Here are 3 things employers need to think about regarding a settlement agreement:

1  Legal requirements

In order for a settlement agreement to be legally binding, there are a number of conditions under the Employment Rights Act that need to be satisfied. If the agreement does not fulfil all these requirements, it will be invalid and unenforceable. This means that the employee can still lodge a claim at an Employment Tribunal. However, they will need to repay any payments received under the settlement agreement.

This is why it is essential to get the agreement drafted by a legally qualified professional. They can draft your settlement agreements to ensure that it complies with all legal requirements and is in your organisation’s best interests.

2  Confidentiality

Not every conversation you have about settlement agreements is automatically ‘off the record’.  Without such confidentiality in place, employers face a significant risk in any future litigation.

There are two main ways to conserve the confidentiality of conversations:

  • Under the ‘without prejudice’ principle; and/or
  • Section 111A of the Employment Rights Act 1996.

Let’s start with the without prejudice principle first. This is a non-statutory principle, which can apply to any Employment Tribunal or court claim, such as breach of contract, discrimination, unlawful deduction of wages, etc.

However, a number of conditions need to be fulfilled:

  • There must be an existing dispute.
  • The discussions must be a genuine attempt to settle the dispute.
  • There must be no ‘unambiguous impropriety’ in the conduct of the parties during the negotiations and discussions.

This means that if, for example, you offer it without having spoken to the employee about their performance issues, you will not be covered by the without prejudice principle as there is no existing dispute. There is a significant risk here that the employee will argue that the relationship of trust and confidence has broken down. As such they can resign and claim constructive dismissal and use the content of these discussions to support their claims.

It is therefore advisable that there is an agreement between the parties that the discussions and negotiations would be held on a without prejudice basis. If the employee refuses to discuss matters on a without prejudice basis, you should not continue with those discussions.

On the other hand, the provisions of section 111A of the ERA cover pre-termination negotiations. It applies to any offer made, or discussions held, before termination of employment, with a view to the employment being terminated on terms and conditions agreed between the parties.

Its scope is very limited as it only applies to claims of ‘ordinary’ unfair dismissal. This means that provisions of s.111A do not apply to ‘automatically unfair dismissal’ claims, for example, an employer dismisses an employee because they have taken paternity leave or discrimination claims. It will also not apply if there was improper behaviour or conduct in something that was said or done during negotiations, for example, bullying, not giving the employee enough time to consider the terms of the offer made, telling them they will be dismissed if they do not accept the settlement, etc.

As we have seen it is extremely important that employers take the right steps when engaging in these conversations to preserve the ‘off the record’ status of the conversations.

3  References

If you are providing a reference within the settlement agreement, it is important to make sure that it is this reference which is provided on receipt of any request. A failure to do so will be in breach of the agreement.

We would always recommend you keep your references brief to reduce the risk of liability. Furthermore, in the agreement, you reserve the right to amend or decline to provide one if after the date of the agreement something serious occurs which affects your decision to provide a reference.

One last thing…

You also need to think about the costs it will generate. Having to provide big payouts to employees can become very costly.

It is also not a solution to every problem you face. Other alternatives should also be considered.

You also need to think about what happens if you can’t agree with the employee – how will the employment relationship continue? It may be very awkward and uncomfortable.

To explore whether it is the right choice for you, you should seek legal advice.

Director of Legal Services

James Tamm

Whether you’re facing an immediate challenge or just want the reassurance of an expert second opinion, we’re here to offer clear, commercial advice so that you can focus on what you do best.

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