A settlement agreement can be a useful tool for both employer and employee to help resolve a dispute amicably and facilitate a smooth exit from a business.  One of the reasons an employer seeks to use a settlement agreement is to protect themselves from potential future Employment Tribunal claims; however, a recent Employment Appeal Tribunal case has raised the question of how a business can do this if the claim is an unforeseen one at the time of the settlement agreement.  Sarah Dureau, Partner in our Witney office, evaluates the facts of the case before providing her advice on the best course of action for employers.

What is a settlement agreement?

A settlement agreement is a legal agreement between an employer and employee which is often used as an offer for an employee to leave a business with a compensatory payment attached.  In return, the main benefit for you as the employer is that the employee agrees to waive certain rights to bring a tribunal claim against you, for example, for unfair dismissal, breach of contract, or discrimination.  It is essentially a contract between you and the employee, but for certain claims, there are statutory provisions that must be complied with for it to be legally effective.

Amongst other things, an employer must provide the document in writing and the employee must have received independent legal advice. In addition, it is not enough for there to be a blanket waiver of claims; the agreement must relate to the specific claims that will no longer be able to be brought by the employee upon signing, which is the topic up for discussion in the recent case of Bathgate v Technip UK Ltd and others.

Redundancy and settlement agreements

This case in particular involves a redundancy situation. The employee stated he had been discriminated against on grounds of his age when, sometime after his employment terminated, his employer decided not to pay him a pension payment.  This was determined under the terms of a collective agreement that excluded anyone over 61 years of age at the date of dismissal being eligible. The employer submitted that the employee had settled any claim he might have for age discrimination when he had accepted a redundancy package and signed a settlement agreement that waived age discrimination claims.

The Employment Tribunal (ET) agreed with the employer that Mr Bathgate was not permitted to bring such a claim as, under the terms of the settlement agreement, he had waived his rights to do so.  Mr Bathgate subsequently appealed, and the Employment Appeal Tribunal (EAT) allowed the appeal on Mr Bathgate’s argument that he could not waive future claims that had not yet arisen at the date of signing the agreement.

The reason for this was that despite the fact age discrimination was listed as one of the claims  being waived in the settlement agreement, the particular age discrimination claim  he went on to make had not been specified because it had not arisen at the time of his dismissal. The discriminatory decision not to pay the pension payment to Mr Bathgate was made some months after he had agreed terms that he would receive any payment from the pension for which he was eligible.   The EAT held that a settlement agreement had to refer to a particular claim that has already arisen between the employer and employee. The EAT went on to state that Mr Bathgate had signed away his right to make an age discrimination claim when he was not aware that there would be a claim to make in the future. Under the statutory provisions, that was not possible.

Tips for employers when drafting settlement agreements

While the headline finding here may be of concern to employers, this judgment applies to relevant statutory claims only, i.e. those that must be settled under the strict form and rules of a settlement agreement and to which the requirement for ‘the particular claim’ to be waived applies.  This case relates to such statutory claims that are not known about or that have not arisen at the time of the agreement.  The EAT confirmed that its finding was not incompatible with previous case law that provided that it was possible to contract out of future claims.

However, that was in relation to either future claims that were known at the time of the settlement agreement or where there were no specific statutory requirements to comply with, for example future contractual claims, even if they had not yet arisen. In both instances, the drafting would have to be clear and unequivocal as to what was being provided and the normal rules of contract formation would apply.

As employers, settlement agreements are turned to relatively frequently and they certainly give you more reassurance than simple dismissal, which gives total uncertainty for a period of time as to whether the employee might decide to bring claims that can be costly and time consuming, even when without merit. However, if you are negotiating and paying an employee more than otherwise might be due, you will want as much certainty as you can that a line has been drawn completely under the employment relationship.

It is important that employers consider every possible situation when asking an employee to sign a settlement agreement.   Each agreement must be tailored for each individual employee; a blanket approach to settlement agreements is an easy way to fall foul of the legislation in claims where the strict requirements apply.   Seeking legal advice prior to sending the settlement agreement, or even considering whether a settlement agreement is appropriate, is vital to ensure the agreement is reasonable and that you have met the criteria to make it enforceable in the future.

This case also serves as a reminder that all of your employment documentation, contracts and policies should be regularly updated, and that when there is new legislation that these are reviewed.  Keeping up to date with relevant case law can also bring its benefits in seeing how the legislation is applied in different situations.

If you are an employer who is considering offering an employee a settlement agreement, or you wish to discuss a contract review, you can contact Sarah and the Employment team today on 01993 670944 or email moc.n1675878874ellub1675878874rekra1675878874p@uae1675878874rud.h1675878874aras1675878874 to find out more.

ENDS

This is for information purposes only and is no substitute for, and should not be interpreted as, legal advice.  All content was correct at the time of publishing and we cannot be held responsible for any changes that may invalidate this article.

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Sarah Dureau

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