Settlement Agreements - a guide for employees
Settlement Agreement Solicitors
If you’re being offered an employment settlement agreement then you have the right to get advice from a lawyer on this – our specialist settlement agreement solicitors can advise you on the settlement agreement terms you have been offered and seek to negotiate these for you
Read our guide on settlement agreements below
Settlement agreement guide
This practical guide, drafted by our expert settlement agreement solicitors, outlines what an employment settlement agreement is, how much you should expect to be paid for a settlement agreement, and what key terms a settlement agreement normally includes:
What is a settlement agreement?
An employment settlement agreement is a legally-binding contract between an employer and an employee, under which the employee agrees to accept some form of benefit (normally a sum of money) in return for agreeing not to bring particular legal claims against their (former) employer. This is why the agreement is called a “settlement agreement” – the employee is agreeing to “settle” their right to bring certain claims in the Employment Tribunal or civil courts. We refer to these settlement agreements as “employment settlement agreements” in order to distinguish them from other types of settlement agreements that you might receive in other areas of law (for example, a divorce settlement agreement).
Employees must receive legal advice from a qualified independent legal adviser (such as specialist settlement agreement solicitors) before they sign the settlement agreement. The purpose of the legal advice is to allow employees to be completely aware of their legal rights, the terms of the agreement, and their ability to present any form of claim to the Employment Tribunal. Settlement agreements between employers and employees are extremely common in England and Wales but the law stipulates that such agreements cannot be enforceable unless they meet certain “requirements”, one of which is they they receive legal adviser from an independent adviser. We will explore the other requirements later in this guide.
To explain the purpose and effect of an employment settlement agreement, we must first look at the different types of legal rights under UK law that employees may be asked to ‘waive’ under a settlement agreement. These are explained below.
Further reading: what are the requirements for a valid settlement agreement?
What kind of claims would be I be settling under an employment settlement agreement?
You have three broad ‘types’ of employment rights under UK law:
- Contractual rights
- Common law rights
- Statutory rights
Contractual rights are the rights that you have under the terms of your contract of employment. These terms are either express (in writing in the contract or associated documentation) or implied (implied into the contract by, for example, custom and practice). Contractual rights include your right to a particular period of notice; holiday entitlement; your right to receive a salary, any bonus, and/or commission; your position, place of work, and the like.
Common law rights
Common law rights are legal rights that derive from the common law, such as a right to pursue a claim for, for example, negligence and defamation. Common law rights are rights that can normally only be pursued in the civil courts (the County Court or the High Court).
Statutory rights are legal rights that you have under UK legislation. Statutory rights that apply in employment situations are rights that can normally only be pursued in the Employment Tribunal. Statutory rights include (among others):
- Your right not to be unfairly dismissed or constructively unfairly dismissed from your job (employees normally have to have had continuous employment of at least one year if they started employment prior to 6 April 2012, and two years’ continuous employment if their employment commenced on or after 6 April 2012)
- The right to not be discriminated against, harassed or victimized because of your protected characteristic (for example, your sex, age, disability, and/or race, among others) (no qualifying period necessary)
- The right to have a flexible working request dealt with properly
- The right to receive a statutory redundancy payment (employees have to have had continuous employment of two years or more)
- The right to receive written particulars of employment after eight weeks
- The right to not have sums deducted without authorisation from their wages
- Various family rights, such as maternity and paternity rights
Please note that this is not an exhaustive list but contains most of the ‘normal’ types of claims that an employee might have against their employer.
Waiving your employment rights
Employees have legal rights in the workplace (some of which are listed above), rights that can be enforced in an employment tribunal or court if their employer (or one of the workforce of the employer) does (or fails to do) something which infringes on those legal rights. However, instead of bringing a claim in the employment tribunal or civil courts, you can choose to waive your right to do so and settle your claim through what is called a “settlement agreement”.
If you wish to negotiate an employment settlement agreement with your employer then you must be careful not to prejudice your position by signing any legal documents without first taking legal advice from a qualified legal adviser (such as a solicitor or barrister, among others). If you have been offered – or wish to try and obtain – a settlement agreement then you should seek legal advice from a specialist adviser before signing any papers – some (although not all) employers are unscrupulous and may try and pressure you into settling your claims for less than they are potentially worth.
Under the Employment Rights Act 1996, employees receive a degree of protection from such unscrupulous employers by the legal requirement that the employee must receive legal advice from an independent adviser (such as a specialist settlement agreement solicitor) for their settlement agreement to be binding. This means that there is a legal requirement that you must seek legal advice from a legal adviser (through a solicitor (such as a settlement agreement solicitor), barrister, or a trade union, for example) before your settlement agreement can become enforceable. If you fail to take such legal advice then your agreement will not be enforceable and you may not be able to compel your (former) employer to pay you the sums due under the agreement. In order to properly waive your employment rights and create an enforceable settlement agreement, there must be three signatures on your settlement agreement: your signature, a signature on behalf of your employer (by someone who is properly authorised to do so), and your legal adviser’s signature (to confirm that you have been advised as necessary on the agreement).
If you have already started Employment Tribunal proceedings against your employer then you may – instead of using a settlement agreement – use an agreement called a “COT3 agreement” to settle outstanding proceedings. You may, however, wish to take specialist legal advice from an employment solicitor (such as a specialist settlement agreement solicitor) on the terms and effect of your COT3 agreement before signing it.
What are they called? Settlement agreements or compromise agreements?
Settlement agreements were previously known as ‘compromise agreements’ – their name was changed by the Government in 2013 after a consultation, with the reason being that the Government believed that the term ‘settlement’ was a better description of the settlement process (people didn’t like the idea of ‘compromising’ but they were open to the idea of ‘settling’).
In practice the two names (‘compromise agreement’ and ‘settlement agreement’) are used interchangeably and essentially mean the same thing.
Why do settlement agreement solicitors need to get involved?
It is a legal requirement that you receive independent legal advice from a lawyer (such as specialist settlement agreement solicitors) before entering into an employment settlement agreement – the purpose of this is, essentially, to ensure that the employee is not pressured into signing their rights away by their employer, as they will receive advice from a qualified independent lawyer before deciding whether to enter into it. If you instruct us then one of our specialist settlement agreement solicitors will run through your settlement agreement with you and advise you on it, to make sure that the terms are fair and that you understand them.
What is the purpose of a settlement agreement?
As we explain above, the core purpose of a settlement agreement is to allow the employer and employee to settle their differences rather than pursuing litigation.
What is a valid employment settlement agreement?
In order for an employment settlement agreement to be valid and enforceable it must must satisfy certain conditions as set out in s.203(3) of the Employment Rights Act 1996. These requirements are as follows:
- The settlement agreement must be in writing
- The agreement must relate to a “particular complaint” or “particular proceedings”
- You must have received legal advice from a relevant independent adviser (such as a specialist settlement agreement solicitor) on the terms and effect of the proposed agreement and its effect on your ability to pursue any rights before an Employment Tribunal
- The legal adviser that you instruct must have a current contract of insurance, or professional indemnity insurance, covering the risk of a claim by you against your legal adviser in respect of legal advice given
- The settlement agreement must identify the adviser; and
- The settlement agreement must stated that the conditions regulating compromise agreement/settlement agreements have been satisfied
If your agreement does not meet the above criteria then it will not settle your statutory claims – this would mean that you would technically be able to pursue your (former) employer for your statutory rights. However, the practical effect of doing so will probably be that you will have to pay back some or all of the payments made to you under the settlement agreement).
Read more about this: what is a settlement agreement?
What is the effect of a valid settlement agreement?
The effect of a valid settlement agreement is that an Employment Tribunal will no longer had the jurisdiction to hear claims based on the statutory rights that you have and which are waived under your settlement agreement. Depending upon the wording of the agreement, you may also be prevented from bringing other forms of claims, such as claims for breach of contract or common law claims (such as a claim for negligence).
Our settlement agreement solicitors will discuss your particular circumstances with you when advising you on your settlement agreement, and our employment lawyers will advise you separately about the rights that your employer intends to settle in your case.
What claims can’t be settled under a settlement agreement?
It is usual for the following types of claim to be excluded under your settlement agreement (i.e. you should still be allowed to pursue these types of legal claims):
- A claim for your accrued pension
- A claim for any personal injury (or, usually, for any claim for personal injury of which you are not aware or was not reasonably foreseeable as at the date of the agreement); and
- Any claim to enforce the settlement agreement itself
How will my employer make a settlement offer to me?
If your employer offers you an exit package or a settlement agreement then they may use one of the following phrases in putting the offer to you:
- That they want to have a “protected conversation” with you
- That they are making a “without prejudice offer” to you (they may also describe it as “subject to contract“)
Please note that employers don’t always use these phrases, but they are very common.
Why do I need to consult a lawyer about my settlement agreement?
It is, as above, a requirement of s.203(3) of the Employment Rights Act 1996 that you consult an independent legal adviser on the terms of your agreement in order for your settlement agreement to be valid.
The role of a lawyer (such as a specialist settlement agreement solicitor) in advising you on a settlement agreement encompasses the following duties:
- To explain to you the terms and effect of the settlement agreement, in particular its effect on your ability to pursue an Employment Tribunal claim
- To sign a certificate confirming that you have been advised on the agreement
- To confirm that there is a policy of insurance in place that covers the risk of negligent advice being provided to you (we can confirm that Redmans Solicitors have an appropriate policy of insurance)
Is your settlement agreement a good deal for you?
Technically, your legal adviser only has to advise you on the terms and effect of the settlement agreement that you are signing, with regards in particular to the effect of the agreement on your ability to pursue an Employment Tribunal claim, and does not have to advise you on the merits of your potential legal claims against your employer i.e. whether the settlement agreement represents a “good deal” or a “bad deal” for you.
Our settlement agreement solicitors can of course provide you with advice on the merits of your particular legal claims if you request us to do so. We can also advise you on negotiating the wording of the agreement, should you wish us to do so. The cost of providing this further advice may be covered within the reasonable legal costs that your employer is prepared to pay but if you require substantive advice on these issues then it may fall outside of these reasonable legal costs. It’s a good idea to speak to your settlement agreement solicitor at an early stage to determine the cost of such advice and to prevent any potential misunderstandings.
Generally speaking, if the sums that your employer is willing to pay to you under the settlement agreement are higher than the sums that you would receive under your minimum contractual and/or statutory entitlement and, further, represents a reasonable assessment of the likely value of your Employment Tribunal claim, then there may be merit in signing the agreement. However, what you must bear in mind is that it is not always straightforward to estimate the value of a potential Employment Tribunal claim, particularly if you have not yet left your employment.
It can also be problematic to estimate the value of an Employment Tribunal claim in any event – compensation in Tribunal claims is mainly based upon your loss of earnings from the date that your employment terminated until a future date (normally the date on which you got another job which pays at least as much as your old job or until the date of the Employment Tribunal); it’s difficult to estimate when you might receive employment in the future and, further, it can also be difficult to predict what arguments your employer might use to reduce your compensation. Finally, the process of an Employment Tribunal claim is not always straightforward and this may mean that it could be difficult to estimate your legal costs for pursuing the claim.
However, although there are – as above – certain obstacles to valuing your settlement agreement, we will always try and provide you with the best possible advice and provide you with as much information as possible to allow you to make a reasoned decision about whether or not you wish to sign your settlement agreement.
Further reading: Settlement agreement advice for employees – common questions asked
Should you bring an Employment Tribunal claim or sign a settlement agreement?
If you’ve been offered a settlement agreement then you’ll want to know whether you’re being offered fair terms for settling your potential Employment Tribunal claims, and should therefore sign the settlement agreement, or whether you’d be better served in bringing a claim in the Employment Tribunal to try to obtain compensation.
In order to determine whether the settlement agreement you’re being offered is fair or not, you should have reference to the following key factors:
- The nature of the potential employment tribunal claims you have
- The strength of the potential employment tribunal claims
- The reasonable value of those claims in the employment tribunal
- The amount you’re being offered in the settlement agreement to settle your potential claims
- Other relevant terms in the settlement agreement
The nature of the potential employment tribunal claims you have
Settlement agreements are normally used to settle the following types of potential employment tribunal proceedings: unfair dismissal (including redundancy), constructive dismissal, detriment and/or dismissal due to protected disclosures being made (also known as “whistleblowing”), workplace discrimination (in any form), harassment and/or victimization. Obviously, the types of claim that you can bring will very much depend on the particular facts of your matter. When you talk to the solicitor advising you on your settlement agreement you should put all of the facts of your case to him or her so they can advise you on which potential types of claim you may have.
The strength of the potential employment tribunal claims
You will have to rely on your solicitor to advise you of the potential strength of your employment tribunal claims. Your solicitor won’t be able to provide you with exact chances of success in your case but they should be able to let you know whether they think your case will be successful or not, and why. You should try and provide any and all documentary evidence to your legal adviser so that they can properly assess your claim, as well as letting them know who you think could provide relevant, supportive witness evidence (should this be applicable).
The reasonable value of those claims in the employment tribunal
Again, this is not an exact science at a pre-action stage (i.e. before you issue any claim in the employment tribunal) but your legal adviser should be able to inform you (on a broad basis) as to how much they think your potential employment tribunal claims are worth so this can be factored into an analysis of whether you’ve been offered a reasonably sufficient amount to settle these claims.
The amount you’re being offered in the settlement agreement to settle your potential claims
Your employer will normally inform you of how much they’re willing to offer to settle your claim – this will generally include the statutory and contractual minimum sums that you are owed (such as notice pay, accrued but untaken holiday, any other contractual entitlement e.g. commission or bonus etc.), as well as an ex-gratia sum to compensate you for the manner in which your employment was terminated. You should, at this point, be able to compare and contrast what you’re being offered by your employer against what you have been informed is the reasonable value of your employment tribunal claims.
Other relevant terms in the settlement agreement
How much you’re being paid to enter into a settlement agreement will normally be the most important aspect to a client but it isn’t the only factor. Other important terms in a settlement agreement can include whether the client is deemed to be a “good leaver”, provisions relating to gardening leave and whether there are restrictive covenants contained within the agreement (among other things). You should – as above – provide your legal adviser with a copy of your settlement agreement so they may properly advise you on the entirety of the terms that you’re agreeing to.
What are the advantages of a settlement agreement?
The main advantages of a settlement agreement are as follows:
- They can be used to secure financial compensation for poor treatment at work without both sides having to incur the time, stress, uncertainty and cost of Employment Tribunal litigation
- They can be used to leverage your situation and to increase the compensation payments beyond the statutory/contractual minimum (notice pay, holiday, statutory redundancy pay (if applicable))
- They can be used to negotiate appropriate non-financial terms as part of your settlement package (this is addressed below)
- They can be used to settle a potential Employment Tribunal claim in the most efficient and time-conscious manner
- To use the tax advantages of a settlement agreement
- To allow unhappy employees an exit from potentially stressful and unpleasant situations without having to resort to litigation
What financial payments are normally paid under a settlement agreement?
You can normally expect to receive the following financial payments under a settlement agreement:
- Contractual payments payable to the date of termination;
- Payment in lieu of notice (if you are not serving your notice period or being put on garden leave);
- Holiday pay accrued but not taken as of the termination date;
- Statutory redundancy pay (in a redundancy situation);
- Compensation for termination of employment (also known as an ‘ex-gratia payment’ or termination payment);
- Sums due in respect of bonus payments, share schemes, and/or long-term incentive plans (also known as ‘LTIPs’);
- Additional payments for post-termination restrictions and/or new confidentiality clauses
What non-financial terms can be included in a settlement agreement?
One of the most important non-financial terms that can be included in a settlement agreement is an agreed reference with your employer (see our guide on obtain references from employers in settlement agreements).
Some of the more common non-financial terms that can be negotiated with your employer include:
- Confidentiality clauses;
- ‘Non-derogatory’ clauses (clauses which compel you not to make any negative comments about your employer) (it is common with these clauses to also ask the same of your employer);
- Allowing you to keep company property (such as, commonly, a mobile telephone, mobile telephone number, or laptop);
- Outplacement support (under which the company will fund a business to help you to find new employment);
- Allowing you to keep receiving certain benefits (such as continuing to allow you to use a company car for a certain period of time, to continue to use private medical insurance, and/or to continue to pay employers’ pension contributions)
Our settlement agreement solicitors will discuss your circumstances and your needs with you, in order to ascertain what terms are important for you in the settlement agreement negotiations.
What’s an average settlement agreement payment?
What you can expect to receive for your particular settlement agreement payout will almost entirely depend on your circumstances. Generally, however, you tend to have a stronger case if you have:
- Been employed by your employer for over two years; and
- You are being threatened with dismissal or have already been dismissed or are being forced to resign; and
- You have evidence to prove unfair dismissal or constructive dismissal;
If you satisfy the criteria detailed above then, in our experience, the average settlement agreement payment is normally:
- Between one and four months’ gross salary as compensation for termination of your employment; plus
- Any other contractual sums that you are due (such as notice pay, holiday pay, as addressed above)
If you have evidence to show that you have been discriminated against or are being punished for whistleblowing then you may be able to negotiate more than the average payments detailed above (and, equally, it is less important that you have two years’ continuous employment in such cases).
If none of the above applies then you are probably in a weaker negotiating position. However, you still might be able to achieve a settlement (in our experience it is almost always worth pushing for a settlement payout, as if you don’t ask then you don’t get).
Our specialist settlement agreement solicitors will discuss your circumstances with you and advise you on your potential claims, as well as their value.
What can you expect as a minimum settlement agreement payout?
There are no legal minimum settlement agreement payouts (in terms of an ex-gratia payment). However, if you are offered a settlement agreement then the minimum sums that you are normally legally entitled to receive include the notice payment, holiday pay, and any statutory redundancy payment.
Is there a maximum compensation payout that you can expect?
There is no such thing as a maximum compensation payout but there are certain maximum awards that you can receive for some types of claim (for example, an unfair dismissal claim has a maximum compensatory award).
Employers are not obligated to use the maximum payments that you could receive for a payment as a ‘ceiling’, although they generally do (in our experience) use these maximum payment amounts as guidelines for determining what sums they should pay when negotiating settlement agreements with their employees.
There are no maximum compensation limits in certain types of claim, such as claims for discrimination or whistleblowing.
Our settlement agreement solicitors can discuss with you the appropriate level of compensation for your case.
Further reading: your settlement agreement: how much should you get for it?
Do you have to pay tax on a settlement agreement?
You have to pay tax on certain payments under a settlement agreement, such as:
- Your notice pay;
- Holiday pay;
- Bonus payments;
- Any other contractual payments
You do not have to pay tax (or National Insurance) on an ex-gratia payment up to a maximum amount of £30,000, although any ex-gratia payment will be subject to tax (but not National Insurance) over £30,000.
Payments made as compensation for injury to feelings are generally also not taxable (if the injury to your feelings relates to a detriment that you suffered prior to your dismissal).
You can find further information on this in our article on taxation and ex-gratia payments.
Should you accept a settlement agreement or make a claim in the Employment Tribunal?
There are various factors that you should confider in deciding whether to settle your claim or bring a claim in the Employment Tribunal – these include, among others:
- The uncertainty involved in bringing a claim (i.e. the risk that you might lose the claim);
- The time that it will take to issue and finish a claim in the Employment Tribunal;
- The cost of dealing with the case (particularly if you instruct a lawyer to assist you with your claim);
- The stress involved in litigation
However, if you bring and win a claim in the Employment Tribunal then you will generally receive a greater sum of money as compensation than you will receive under a settlement agreement.
Redundancy settlements – how much should you get?
If you are dismissed for the reason of redundancy in a genuine redundancy situation and the redundancy process used has been fair then your employer is only obligated to pay you statutory redundancy pay (should you qualify – see our redundancy article) plus your notice pay and any other accrued payments (e.g. holiday pay, bonus, commission etc.). You are not legally entitled to receive an ex-gratia payment in these circumstances, although it is generally worth trying to negotiate a redundancy settlement payment.
If you are dismissed for the reason of redundancy then you may have a case for unfair dismissal if there is not a genuine redundancy situation and/or the redundancy process used has been unfair.
If your redundancy has been unfair then you may be able to negotiate a settlement payout similar to the amounts detailed above. Our specialist settlement agreement solicitors can discuss this with you.
Further reading: how to negotiate a higher redundancy payment – 10 top tips
How do I negotiate a settlement agreement?
You should follow the following guidelines in negotiation a settlement agreement with your employer:
- Research the law in order to determine how much your settlement agreement is reasonably worth
- Use any personal connections that you have with management to negotiation your deal
- Think about instructing specialist settlement agreement solicitors to advise you
- Set out clearly what benefits you wish to receive under the terms of the settlement agreement
- Deal with the negotiations with your employer calmly and courteously
- Send a written grievance to your employer detailing your complaints
- Don’t always accept the first offer that your employer makes
- Check the terms of any settlement agreement offered carefully
- Consider carefully the costs and benefits of signing a settlement agreement as compared to litigating
- Make sure that your settlement agreement is legally compliant
You can find more guidance in our article top 10 tips on negotiating a settlement agreement with your employer.
Who will pay the legal fees for the advice on my settlement agreement?
If you agree a settlement agreement with your employer then your employer will generally pay a contribution towards the cost of you receiving legal advice from one of our settlement agreement solicitors (in most situations this legal fee contribution will be somewhere between £350 plus VAT and £500 plus VAT). If you are a senior employee or your matter is particularly complicated then employers do cover greater sums in respect of legal fees (between £1,000 plus VAT and £3,000 plus VAT is not unheard of), but these will normally need to be negotiated.
Can I get a settlement agreement for a personal injury claim?
If you have suffered a personal injury as a result of misconduct on your employer’s part then you can settle such a claim via a settlement agreement. In employment-related claims the most common type of injuries that employers suffer are psychological injuries (such as anxiety, depression, stress, and similar types of injury).
What happens if you choose not to sign your settlement agreement
If you choose not to sign your settlement agreement then this means that you can still potentially pursue your employer in respect of legal rights that you believe your employer has infringed upon. We will advise you on what potential consequences your rejection of the settlement agreement will have – including the potential termination of your contract of employment – and outline some practical next steps for you. However, you should be aware that if you do reject the settlement agreement then your employer will not make a contribution to your fees and you will be responsible for all of the legal fees that we have incurred in advising you.
If you wish to make an Employment Tribunal claim (instead of signing a settlement agreement), then you must first notify ACAS of the details of your claim and engage in “Pre-Claim Conciliation”. If your claim doesn’t settle in the conciliation period (a period of up to one month) then ACAS will issue a certificate which certifies that you have engaged in pre-claim conciliation; this allows you to then bring an Employment Tribunal claim, should you wish to do so. However, the new ACAS pre-claim conciliation service may make the limitation dates for your claim more difficult to calculate and you are advised to seek specialist legal advice on this.
Further reading: I have been offered a settlement agreement – do I have to accept it?
Signing the settlement agreement: it’s your decision
Although our job is to provide you with legal advice on your settlement agreement, it’s not for us to tell you whether to sign your settlement agreement or not – you must make this decision. If you instruct us to advise you on the merits of your Employment Tribunal claims and whether the value of the settlement agreement represents a “good deal”, we aim to give you the best possible information to allow you to make an informed choice about your settlement agreement. Our specialist settlement agreement solicitors will then only sign their part of the settlement agreement if you tell us you want to proceed with it.
Will my settlement agreement be legally binding?
In order for a settlement agreement to be legally binding it must be a valid settlement agreement (as outlined above) and both parties should sign the settlement agreement. The key criteria for a legally binding settlement agreement are as follows:
- The settlement agreement must be in writing
- The agreement must relate to a “particular complaint” or “particular proceedings”
- You must have received legal advice from a relevant independent adviser (such as a settlement agreement solicitor) on the terms and effect of the proposed agreement and its effect on your ability to pursue any rights before an Employment Tribunal
- The legal adviser that you instruct must have a current contract of insurance, or professional indemnity insurance, covering the risk of a claim by you against your legal adviser in respect of legal advice given
- The settlement agreement must identify the adviser; and
- The settlement agreement must stated that the conditions regulating compromise agreement/settlement agreements have been satisfied.
Can a settlement agreement be withdrawn?
The short answer is ‘yes’, a settlement agreement can be withdrawn if it is not accepted by you (with such acceptance normally requiring that you sign the terms of the settlement agreement offered). However, in our experience it is uncommon for an employer to withdraw the offer of a settlement agreement and generally it is the case that the employer and the employee are able to reach an agreement on its terms.
If you are unable to settle your potential Employment Tribunal claims with your employer then you have the following options: to drop your case or, alternatively, issue a claim in the Employment Tribunal. If you want to bring a claim in the Employment Tribunal then you generally first have to make a request to ACAS for ‘ACAS Early Conciliation’. Once you have started the ACAS Early Conciliation process a conciliator will approach you to try and help you reach a settlement with your employer, with the aim of avoiding you having to issue an Employment Tribunal claim.
Can I set aside the terms of the settlement agreement if I think I have been defrauded?
Under the law of contract, there are certain defined circumstances whereby a settlement agreement may be invalid and can be set aside. These include (but are not limited to):
- Where a party to the settlement agreement lack capacity (for example, the party has a mental disability which rendered them incapable of understanding or consenting to the agreement);
- Where a mistake has been made about a fundamental matter or which makes it impossible to perform the settlement agreement; and
- Where there has been a misrepresentation of a material fact in certain circumstances
In this case, the relevant question is whether a settlement agreement can be set aside due to a fraudulent misrepresentation by one party to another, inducing them to enter into the settlement agreement (i.e. that there was a genuine redundancy situation when, it is contended as a matter of fact, this was not the case).
In Hayward v Zurich Insurance Company plc  EWCA Civ 327 (our analysis here) the Court of Appeal held that, while the settlement of an ill-founded claim is nonetheless binding, this is not generally the case if the claim was fraudulent: if, subsequent to the completion of the settlement agreement, it is found that a statement about the claim was in fact fraudulent when the other party had believed it was genuine, this may be sufficient to rescind a settlement agreement. However, fraud does not necessarily ‘unravel all’, even when proved – if the party alleging fraud (“A”) was aware (prior to the settlement agreement being completed) that the representation made by the other party (“B”) may not be true but signs the agreement anyway, this will not be sufficient to unravel the settlement (as A had settled the case “with its eyes wide open”).
Applying the above principles to the current question, the crucial issue in the circumstances is whether the person alleging fraud (“A”) was aware – prior to entering into the settlement agreement – that there may not be a genuine redundancy situation at his employer (“B”). If A had alleged to B that there was not a genuine redundancy situation prior to entering into the settlement agreement, but subsequently entered into the agreement anyway, then it is probable that A would find it difficult to challenge the validity of the settlement agreement on the grounds of fraud: A had entered into the settlement agreement with “his eyes wide open”. However, if A had not alleged dishonesty by B from the outset then he may be able to challenge the settlement agreement on the grounds of fraudulent misrepresentation (depending, of course, on A being able to show on the balance of probabilities that the statement by B to this effect was fraudulent).
The practical outcome of this question is that parties need to take care about alleging fault or dishonesty prior to settling a dispute. Further, they also need to understand the implications of settling: advice from specialist legal advisers on this point will therefore normally be extremely helpful in determining the pro’s and con’s of settling a case.
Why might restrictive covenants be contained in a settlement agreement?
Restrictive covenants are normally relevant for senior employees or executives as they may have access to confidential information or trade secrets of their (former) employer, such as client lists or sensitive financial documents. Employers include such clauses in contracts of employment or settlement agreements to ensure that former employees do not unfairly compete with them after the termination of their employment.
The first thing that an employee should do if their employment with their employer is terminating is to check whether there are any restrictive covenants contained within their contract of employment. If so, then the covenants will apply unless the employer expressly agrees to waive those covenants in the settlement agreement. If not, then the employee has more scope to argue for the “watering-down” or removal of the restrictive covenants in their settlement agreement.
Will a restrictive covenant in a settlement agreement be upheld if an employer seeks to enforce it?
The fact that a restrictive covenant is in a settlement agreement (or compromise agreement) is likely to dispose the court towards enforcement of the restrictive covenant, even though the covenant will be examined by the court to determine whether the scope of the covenant is reasonable. There are a number of reasons why a restrictive covenant which is contained in a settlement agreement will dispose the court towards enforcement, including:
- Both parties in the settlement agreement will normally be legally represented (as a statutory settlement agreement is not valid if the employee does not receive legal advice from an independent adviser)
- The parties are able to better judge the reasonableness of a covenant at the termination of employment and are therefore in a potentially better position to negotiate the covenant
- The court may determine that the parties are no longer in an unequal bargaining position and the situation may be perceived to be more of a “commercial arm’s length transaction” (although in most settlement agreements the positions are still very much unequal!)
ACAS and settlement agreements
ACAS is a neutral Government-funded body and is not on anybody’s ‘side’ – the ACAS conciliator will not be able to advise you on your claims but will act as a ‘go-between’ between you and your employer. If you instruct a settlement agreement solicitor, however, your lawyer will seek to ensure that the terms of the settlement agreement are in your favour as much as is possible.
If you agree a settlement agreement with the help of the ACAS conciliator then ACAS will generally use their own settlement agreement (known as a ‘ACAS COT3 agreement’) to set out the terms of settlement in writing.
Both an ACAS COT3 agreement and a standard settlement agreement serve the same purpose – they are setting out the terms of settlement reached between the employer and the employee. It is not strictly necessary to instruct a settlement agreement solicitor to assist with advising on your COT3, but it can help to reach a better outcome.
Case studies: advice on settlement agreements that our specialist settlement agreements have provided to clients
- Redmans help client negotiate increase of over £40,000 to their settlement agreement
- Redmans help client increase their settlement agreement offer by over £3,500
- Redmans help client increase their settlement agreement offer by over £3,000
Legal cases: settlement agreement cases that have gone to the courts
- Mrs G Coles v. Elders’ Voice UKEAT/0251/19/VP – in this case the Employment Appeal Tribunal found that misrepresentation was a sufficient reason to inspect “without prejudice” documents (read our analysis of the case)
Speak to one of our specialist settlement agreement solicitors today
If you’re looking to take advice on a settlement agreement then speak to one of our specialist settlement agreement solicitors today. Before you instruct a solicitor to advise on your agreement we recommend that you review our article on how to choose the right settlement agreement solicitor for you.