A Settlement agreement (formerly known as a compromise agreement) is a legally binding agreement between an employee and their employer by which the parties compromise an employee’s contractual and/or statutory claims. Settlement agreements are most commonly entered into on termination of employment, although they can be used where employment is continuing.
The 2-Year Qualifying Period
There are many claims that an employee may not bring until they have been employed for at least 2 years (known as the Qualifying Period). These claims include some of those most commonly advanced by employees, including most unfair dismissal and constructive dismissal claims.
There are limited exceptions to the 2-year rule, most notably discrimination and breach of contract claims. To an extent, however, an employer who wishes to dismiss an employee with less than 2 years continuous employment may do so with minimal risk. As a result, some employers choose not to follow the usual redundancy or dismissal procedures when dealing with such employees. An employee with less than 2 years’ service would not be able to claim a statutory redundancy payment so may be dismissed with only those payments that the employer is contractually obliged to make.
Although not legally obliged to do so, some employers choose to pay employees with less than 2 years’ service over and above the amount that the employee is contractually entitled to receive. It may be that the employer genuinely wishes to compensate the employee for the loss of their employment, that they are keen to have certainty, and/or that they are concerned about the risk of claims to which the Qualifying Period does not apply.
An employer who is making an additional payment will generally require the employee to sign a settlement agreement. A settlement agreement is a legally binding contract between the employer and the employee under which the employee agrees to waive its right to bring certain claims in exchange for payment. An employee does not have to enter into a settlement agreement but will often do so in order to obtain the additional payment being offered. When an employee has less than 2 years’ service, their negotiating position is likely to be weaker, although depending on the circumstances there may be points which could be raised on their behalf.
What to do when Notified of Redundancy Within 2 Years
If you are notified of redundancy but have less than 2 years’ continuous employment, you should:
- Check that you do indeed have less than 2-years employment; in some circumstances previous employment may count, or your notice period may be sufficient to take you over the 2-year mark. The date on which your period of continuous employment began should be specified in your contract. If in doubt take advice.
- Check your contract carefully so that you can make sure that you are at least receiving all of the payments to which you are contractually entitled. As a minimum, your employer will be required to pay your salary up to termination and any sums due in respect of accrued but untaken annual leave. If you are not working your notice period, you should be given payment in lieu of notice. When reviewing your contract, you should in particular check:
- Notice period: Your contractual notice period may be longer than the statutory minimum (which is one week’s notice for anyone who has completed continuous employment of at least one month but less than two years).
- Any contractual incentive/bonus schemes: If you are entitled to a contractual bonus or incentive you should also check the relevant scheme rules.
- Check whether you have any untaken but accrued annual leave which will not be taken before the termination date. Agree the number of days outstanding with your employer and the amount you will be paid for them and ensure this is recorded in the agreement.
An employee is required to obtain independent legal advice in relation to a Settlement Agreement in order for it to validly exclude any claims for breach of statutory rights. Settlement Agreements almost invariably attempt to exclude such claims, so it is normally a condition of obtaining any enhanced payment on termination that independent advice is obtained. Employees must be advised on the terms of the agreement and in particular upon its effect on their ability to pursue any claim against their employer in relation to the termination of their employment. The employer will usually agree to make a payment towards this advice which should be recorded in the Settlement Agreement.
If you require advice on a Settlement Agreement or potential redundancy situation, please contact a member of our Employment team.