What makes a settlement agreement binding?

A settlement agreement is a common way of an employer and employee finalising an arrangement between them.

It’s often used to bring employment to an end on agreed terms. But the agreement can also be used to settle a particular issue – alleged discrimination, for example – to avoid having this heard at tribunal and, in the case of an employee (because job applicants can also be party to settlement agreements) without ending the employment. Either way, the ‘settlement’ should draw a line and prevent certain claims from being brought in the future – something businesses will be keen to ensure.

However, for a settlement agreement to have its intended effect it must meet some statutory requirements:

1. The agreement has to be in writing
2. It must relate to a specific complaint or legal claim
3. The employee must have had independent legal advice on the agreement’s terms and effects
4. The relevant legal advisor must be insured and must be named in the agreement
5. The agreement must set out the claim(s) it covers, and state that the above legal requirements have been met.

Getting some part of this wrong carries the risk of an employer being left unprotected from the employment claims it had sought to avoid.

Is a settlement agreement always the best way?

Settlement agreements are routinely used by some employers to bring a swift end to actual or potential legal problems. In return for an employee giving up their right to bring an unfair dismissal claim, for example, the employer will make a financial offer and agree other terms (such as a reference) that will allow the employee to move on. While that will be the right move for an employer to make in some situations, it’s always important to first consider if it would make legal, financial and practical sense. As employment lawyers, we help clients find the best way of resolving issues so that the business and, where appropriate, relationships are protected.

For advice about a workplace issue or for help in preparing or finalising a settlement agreement, contact our team on employment@bsandi.co.uk or call on 01264 353411.