Why Are Settlement Agreements Important in HR?

Formerly known as compromise agreements, settlement agreements came into effect in July 2013 and are legally-binding contracts that terminate an employment contract on agreed terms. Essentially, these contracts are used to prevent employees from taking legal action against an employer on matters covered by the agreement. These contracts are beneficial to HR teams as they allow for a clean break between an employee and employer, while protecting the business from any harmful or costly legal action further down the line. It’s a win-win for both parties as there is the security of a termination document outlining what financial settlement the employee is receiving as well as ensuring that the company won’t have to deal with any claims in the future.

What Do HR Teams Need to Know?

In order for a settlement agreement to be legally binding, there are several conditions that the contract must meet:

  • The agreement has to be in writing
  • It has to relate to a specific complaint or proceedings
  • The employee in question must have received independent advice from an advisor on the terms of the settlement and the effect of the proposed agreement, so that they understand the effect it will have on the employee’s ability to pursue the complaint or proceedings before a tribunal.
  • The independent advisor must have a contract of insurance or professional indemnity insurance to cover the risk of that claim made by the employee in respect of a loss arising from their advice.
  • The agreement must identify the advisor.
  • The agreement must state clearly that the statutory conditions that regulate the settlement agreements have been met.

In the past, employers would only initiate a settlement agreement discussion when the without prejudice rule applied – a rule that prevents statements being made in an attempt to settle the dispute from being put before a court or tribunal as evidence. But changes to the Employment Rights Act of 1996, Section 111A, now provides a wider scope for these discussions and allows for agreements to be introduced on a confidential basis, whether or not there is a current employment dispute between the relevant parties.

The Importance of Settlement Agreements

Settlement agreements are versatile – they don’t have to only be used to terminate an employment relationship but can also be used to settle disputes mid-contract as well as at any point in the relationship. But employment tribunal overseers, Acas, suggest that settlement agreements should not be used in excess in any company. They come with the cost of financial compensation as well as potentially damaging the wider relations within the company if they’re not handled properly. It’s always better to try and resolve disputes through discussions and regular communication first, before any settlement action is taken. Going all in with a settlement straight away can be seen as a heavy-handed approach to some issues. But, if all other methods have failed, then settlement agreements provide HR with a quicker and easier resolution that is less stressful than a tribunal. Using this HR software, processes like this are much smoother to deal with.