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Settlement Agreements Explained

What is a Settlement Agreement?

Formerly known as a Compromise Agreement, and referred to by lawyers in the official format in which they are drafted by ACAS (the Advisory, Conciliation and Arbitration Service), a COT 3, Settlement Agreements as they are now known, are an official agreement intended to resolve a dispute or conflict between parties in an employment context. Section 147(3) of the Equality Act 2010 states that a Settlement Agreement is a contract in relation to which each of the following conditions is met, ‘(a) the contract is in writing, (b) the contract relates to the particular complaint, (c) the complainant has, before entering into the contract, received advice from an independent adviser about its terms and effect (including, in particular, its effect on the complainant’s ability to pursue the complaint before an employment tribunal), (d) on the date of the giving of the advice, there is in force a contract of insurance, or an indemnity provided for members of a profession or professional body, covering the risk of a claim by the complainant in respect of loss arising from the advice, (e) the contract identifies the adviser, and (f)the contract states that the conditions in paragraphs (c) and (d) are met.’

Similar definitions are also to be found in other relevant pieces of employment legislation- such as s203(3) Employment Rights Act 1996, regulation 35(3) of the Working Time Regulations 1998 and section 49(4) of the National Minimum Wage Act 1998, to name but a few.

ACAS’ published results from 2018-2019 show that 73% of cases settled without need to go to a tribunal. That means that the Claimant has either decided to not pursue the complaint, or that a settlement was agreed between the parties.

Either side in a potential dispute can suggest negotiating such an agreement at any time up until an employment tribunal delivers judgment in their case, but it requires agreement from both parties before it is legally binding. It is voluntary to enter in to a settlement agreement. A potential Claimant has a right to independent advice upon the terms of the agreement, paid for by the employer or Respondent, because it is vital that they understand that by signing the agreement they are entering in to a contract which entitles them to the agreed payment upon relinquishing or waiving the right to pursue their claim or potential claim any further. It may even be that by signing the agreement, an employee’s employment is terminated by mutual agreement.

A settlement agreement is therefore not something that should be entered in to lightly, or without first having considered carefully the implications. Barristers, solicitors and other specialist employment lawyers advise individuals on these agreements all the time, paid for at a rate of £300 to £500 plus VAT by the employer. In a recent case in the Employment Appeal Tribunal, Solomon v the University of Hertfordshire UKEAT/0258/18/DA and UKEAT/0066/19/DA, the Court commented in passing that whilst such remuneration would cover the implications of accepting the agreement and the meaning of the terms therein, it was wholly unrealistic to expect that advice to also cover advice on merits and quantum. As the court was not asked to decide on this point particularly it remains to be seen if such comments will be followed in law or in practice.

Some lawyers now ask employees to contribute to the costs of the advice given, but in the majority of cases the advice required is focused on amending any errors in the terms proposed, negotiating any additional factors such as the terms of a reference, apology or announcement, and agreeing the termination reason, date and return of property, which all come within the scope of the fee paid by the employer.

Sarah Hornblower is a barrister in the Employment Team at Colleton Chambers. If you require assistance with drafting a Settlement Agreement, or advice on the terms of one, please contact Sarah’s clerk, Josh Warren, on 01392 274898 or email at joshuawarren@colletonchambers.co.uk.

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