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GN Law Media: The birth of settlement agreements

The term “compromise agreement” is commonly known as the agreement by which the employee agrees to settle the claims they have (or might have) against their employer in return for consideration which is normally a sum of money to compensate them for settling their claim.  These agreements are normally offered either before dismissal or at termination to avoid any employment tribunal claims.  Once a tribunal is underway they are often replaced by the COT3 which is normally a shorter written agreement agreed between the parties through ACAS.  Well from the 29th July 2013 the term “compromise agreement” will itself be terminated and the new “settlement agreement” will be born.

Settlement agreements are really a relabeling of compromise agreements.  Settlement agreements are therefore a legally binding contract which settles a claim on agreed terms.  Often they terminate an employee’s employment but this is not always the case.  The key thing is that once concluded, if they all the conditions are met, then they prevent an employee from pursuing that claim before the Employment Tribunal.  The rules as to conditions under which settlement agreements are binding, are the same as those which have traditionally existed for compromise agreements such as the need for the employee to receive independent legal advice.

A new section has been inserted into the Employment Rights Act to deal with the confidentiality of termination discussions before termination.  Employers were sometimes cautious of raising a compromise agreement for fear of the “without prejudice” discussions coming back to haunt them when they do terminate employment as a suggestion that the outcome was pre-judged.  The new law does not replace the without prejudice rules but supplements it, to allow discussions to take place even where there is no dispute to be settled or where one party has no knowledge of the employment issues even being in existence.  The law prevents these discussions being relied upon in an unfair dismissal claim but does not prevent them being used in other claims.  Further, there is also a requirement that there is no improper behaviour otherwise the Tribunal may consider it just to allow those discussions before the Tribunal. 

ACAS will in due course be publishing a Code of Practice to assist employers and employees in dealing with these changes.  At the time of writing there is only a final draft in existence.

Sarah King, Consultant Solicitor

Posted on Thursday, 25th July 2013