Are there limitations on what a settlement agreement can achieve?

We often advise employers on how to manage relationships with their employees at work. This includes steps to settle disputes or recommendations on how to follow fair procedures to handle employees’ conduct and behaviour at work.

Typically, this involves following a disciplinary or capability procedure in order to investigate the matter, set targets for improvement or issue warnings to employees. However, an alternative to following such procedures can be offering an employee a settlement agreement.

What is a settlement agreement?

A settlement agreement is a legally binding contract between an employer and employee. The use of settlement agreements is often associated with the termination of an employee’s employment, but they can also be used when an employee’s employment is ongoing.

What can settlement agreements achieve?

Settlement agreements can settle potential claims that an employee may have against their employer, such as:

• Contractual claims (for example, wrongful dismissal);
• Statutory claims (for example, unfair dismissal and certain claims under the Part-time Workers Regulations or Fixed-term Workers Regulations);
• Personal injury claims; and
• Discrimination claims.

In addition, they provide employers with protection in relation to post-termination restrictions and the ongoing duty of confidentiality on employees.

Are there limitations on what settlement agreements can achieve?

Although settlement agreements settle potential claims that may have otherwise arisen, there has been continuing discussion over whether settlement agreements can settle future claims.

In the recent case of Bathgate v Technip UK Ltd and Others 2022, an Employment Appeal Tribunal held that an employee’s age discrimination claim against his former employer had not been settled under a settlement agreement because at the time the settlement agreement was entered into, the particular discrimination claim had not yet arisen. This case distinguished between potential claims that the parties were aware of but had not been brought, and claims that could arise in the future.

What could Bathgate mean for future settlement agreements?

Following the decision in Bathgate, there is arguably increased uncertainty from employers on the level of protection they receive from settlement agreements. To protect themselves as much as possible, employers should carefully consider the waiver of claims within a settlement agreement to ensure the claims they wish to settle are included.

Pros and cons of settlement agreements

There are many advantages to entering into a settlement agreement, namely:

• Financial confidentiality regarding the package that is offered;
• Potential claims being settled;
• Certainty of arrangements which cannot be said for Employment Tribunal proceedings;
• Increased security through the use of reaffirmation letters; and
• Greater time and cost-effectiveness compared to litigation in an Employment Tribunal.

However, there are cons and risks to consider prior to entering into a settlement agreement, such as:

• An employee bringing a breach of contract claim at a county court if the employer breaks the agreement;
• Discrimination claims where a settlement agreement offer is not made without prejudice; and
• The inability to settle future claims.

Conclusion

Despite the increased ambiguity following the decision in Bathgate, settlement agreements are widely used and can provide employers with certainty and protection that litigation cannot.  For advice on the use of settlement agreements, please contact our Employment Law Team today by emailing employment@warnergoodman.co.uk or calling 023 8071 7717.