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Are settlement agreements and compromise agreements the same thing?

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On the 29th July 2013, compromise agreements were renamed settlement agreements. The name change was merely a stylistic decision by the government, who believe the wording better represents the agreements. The actual substance of the agreement, remains the same.

On the same date, section 111A of the Employment Rights Act 1996 came into force. This allows greater freedom for employers to have confidential discussions with their employees regarding any issues before they become a formal “dispute”.

These confidential discussions are usually subject to the “without prejudice rule”, which prevents any statements made during an initial meeting being used in a tribunal as evidence. However, this does not apply in cases of discrimination, whistleblowing or other automatically unfair dismissal claims.

 What is a settlement agreement?

If an employee makes a complaint to their employer, it is often possible to resolve the issue informally, for example in a conversation between the employee and their manager. However, if the employee decides to escalate their complaint further, the employer may try to negotiate with them to avoid their claim being taken to an employment tribunal.

This can be done by:

  • Negotiating a COT3 agreement through Acas (The Advisory, Conciliation and Arbitration Service)
  • Getting the employee to agree to a ‘settlement agreement’

A settlement agreement is a legally binding contract between the employee and their employer to settle a dispute, either during recruitment, during employment or after the termination of their employment.

What kind of claim can be resolved with a settlement agreement?

There are many different kinds of claims that can legally be resolved by a settlement agreement. These include claims of unfair dismissal, whistleblowing, age/race/sex or religious discrimination and equal pay to name a few.

There are certain types of claims that cannot be resolved with a settlement agreement, including future personal injury claims or claims for failure to inform and consult in connection with collective redundancies.

What is the process of a settlement agreement?

Normally settlement agreements are negotiated just before or at the end of employment, but it is possible to enter into one where the employee remains in employment, for example, if you’re negotiating a dispute over pay or holiday entitlements.

A settlement agreement is entered into voluntarily by both the employer and the employee, so it’s important to remember that if, as an employee, you are offered a settlement agreement by your employer that you have the right to negotiate the terms and you are under no obligation to accept the offer.

Employees can negotiate these terms with their employer face-to-face or in writing by email or post. It is a legal requirement that an employee be given advice from a solicitor or certified, authorised trade union representative before signing a settlement agreement, which the employer will usually pay for. The employee’s advisor should also ensure that any settlement offered is fair and reasonable based on the claim being made.

Reaching a settlement agreement

If an agreement is reached between an employee and their employer, it’s important to make sure the settlement agreement meets the following conditions to be legally binding:

  • It is in writing
  • It relates to a particular dispute
  • It sets out the terms of the agreement
  • The employee has received advice from an independent legal adviser
  • The employee’s independent legal advisor has been identified
  • It states that the agreement has met the rules about settlement agreements

If you’re in need of advice on a settlement agreement, whether as an employee or employer, get in contact with our senior specialist employment lawyer, Paul Hardy.