Statutory settlement agreements (formerly known as compromise agreements) were first introduced into law by the Trade Union Reform and Employment Rights Act 1993. The law relating to settlement agreements is now found in section 203 of the Employment Rights Act 1996 (“ERA”).
The purpose of a settlement agreement is to ensure that, in return for whatever termination arrangements are being offered by the employer to the employee, the employer has the security of knowing that the employee has validly waived all claims arising from his employment or its termination. In other words there is a clean break between the parties.
In order to be valid, a settlement agreement must satisfy the following conditions:-
- it must be in writing
- it must relate to a particular proceeding
- the employee must have received advice from a relevant independent adviser as to its terms and effect
- the adviser must have a current contract of insurance or professional indemnity insurance covering the risk of a claim by the employee
- the agreement must identify the adviser, and
- the agreement must state that the statutory conditions regulating settlement agreements have been satisfied.
Our employment law team has extensive experience of drafting and advising upon settlement agreements both from the angle of the employer and the employee.
A key aspect of the settlement agreements’ regime is the function of the adviser who gives advice to the employee before the settlement agreement is signed. The adviser must owe his/her duties solely to the employee and be independent of the employer. The adviser must advise the employee on “the terms and effect of the proposed agreement and, in particular, its effect on his ability to pursue his rights before an employment tribunal”.
Only certain individuals can act as advisers to employees signing settlement agreements. These are:-
- trade union officials who have been certified as competent to give advice and as authorised to do so on behalf of the trade union, and
- certain advice centre workers who have been certified as competent to give advice and as authorised to do so on behalf of the centre.
Compromise/settlement agreements have generated a fair amount of case law since their introduction.
Some of the key cases are set out below.
- Lunt ‑v‑ Merseyside TEC  - blanket waiver agreements are not permitted. To be capable of being compromised, claims must first have been “raised” with the employer.
- Hinton v University of East London  – claims must be specifically identified – either by narrative description or by reference to the relevant statutory provision. “Full and final settlement of all claims” type wording is insufficient.
- Royal National Orthopedic Hospital Trust v Howard  – as regards common law claims, the parties can compromise future as well as existing claims provided that clear words are used. Query whether, as regards statutory claims, because of the need for the agreement to “relate to particular proceedings”, it is possible to validly compromise future statutory claims in this way.
- CMC Group v Zhang  EWCA Civ 408 – a case dealing with the issue of whether a repayment clause which applied in the event of a breach of a settlement agreement by an employee was void because it was a penalty clause.
- Byrnell v British Telecom  – an employment tribunal does not have jurisdiction to hear a claim based on an alleged breach of a settlement agreement because it was not a claim which was outstanding when the employee’s employment terminated.
- Collidge v Freeport plc  – in March 2006 the employer’s board decided to suspend the chief executive pending investigation into various allegations against him, mostly relating to financial impropriety. The employee chief executive indicated that he would rather resign and negotiate a settlement agreement and this was duly done. It was made a condition precedent of the employer’s liability to perform its obligations under the settlement agreement that the employee was not in breach of a term by which he confirmed that he had not previously committed any repudiatory breaches of his contract of employment that would have entitled the employer to terminate his employment, i.e. there were no skeletons in his cupboard. After signing the agreement (but before paying any sums due) the employer continued to investigate the allegations and the trial judge found that they would have been entitled to dismiss the employee summarily on the basis of their findings. Counsel for the chief executive argued in the Court of Appeal that the employer had elected not to treat the employee’s repudiatory breach as bringing the agreement to an end, or at least not before his right to payment had accrued. All three judges rejected this construction of the agreement. Tuckey LJ, giving the lead judgment, said that it was a carefully drafted agreement, and that its construction was put beyond doubt when its context was considered.
- McWilliam v Glasgow City Council  – The Scottish EAT held that it is not necessary that the advice given on a settlement agreement is such as would allow the complainant to make an informed decision. All that is required is that the employee is advised what the terms of the settlement agreement are and what they mean. This would include the scope of the claims, what claims are being compromised, how any payment would be treated for tax purposes etc. This is to be distinguished from an assessment of whether or not the agreement is a 'good deal'. The court also held that (a) there is no requirement for a claim to be lodged with the ET before it can be compromised; and (b) the solicitors who agreed the settlement agreements were independent even though their fees were paid by the City Council and had attended a meeting at which the logistics for mass advice sessions had been set by the Council.
Our Employment Law Team
Our employment law team has extensive experience of drafting and advising upon settlement agreements both from the angle of the employer and the employee. For all queries contact either Carl Vincent or David Morgan.