Settlement agreements

Purpose

A settlement or “compromise” agreement may be used when an employee leaves their job (or sometimes when their employment is continuing), in circumstances where there is some issue to be resolved or “right” that the employee asserts. Where the parties agree terms, these are usually recorded in a formal document which, if executed in accordance with the legal requirements – see below – can amount to a binding settlement of claims and in this way “close off” legal risk.

In exchange for the employee’s agreement not to pursue – or to discontinue – any claims or complaints, they will receive a “compensatory” payment and/or other non-financial benefit(s). This is, in effect, the “price” of the employee’s forbearance from bringing claims and the legal “consideration” (money or money’s worth) which is needed to support the “deal” struck. Frequently, severance terms will be negotiated between the parties with each side assessing the “value” to them of settling in light of the risks and costs associated with litigation.

Compensatory payment

The amount of termination compensation which is paid as part of a settlement depends on the nature of any claims or complaints raised by the employee, the factual and evidential position (what has happened, how robust the employer’s process has been etc.) and the respective negotiating positions of the parties more generally. Essentially, the amount paid will be a commercial matter for the employer to decide based on its assessment of the litigation risks and the saving of time and costs gained by avoiding litigation.

Often, a settlement “package” will refer not just to the compensation element but will wrap up other termination payments as well – e.g. notice pay and accrued holiday – and any non-financial terms such as an agreed reference and arrangements relating to termination. The taxation/treatment of payments and benefits under a compromise agreement for National Insurance purposes needs reflecting correctly.  This may require legal or other technical input, particularly in the case of more complex settlements.

Approaching settlement discussions

Either the employer or the employee can propose a compromise agreement and settlement of employment claims on terms. In reality, however, it is usually the employer that raises the option as a means of managing a situation and controlling the narrative around the employee’s departure or other issue underlying the dispute or potential claim.

Parties will invariably wish to explore a settlement on a “without prejudice” basis in case it is not possible to conclude an agreement and they have to “revert” to a formal route (e.g. conclude an HR process or pursue a complaint in tribunal). Just declaring discussions to be “without prejudice” does not necessarily mean that they cannot later be referred to in court or tribunal and how a settlement discussion is approached can be important to successfully resolving the matter. Note that the Isle of Man does not have the concept of “protected conversations” as exists in the UK.

Signing the agreement and MIRS’ role

Assuming that discussions go well and the parties agree the detail of the settlement terms, how is a compromise agreement concluded so as to be legally binding?

Whilst common law claims, such as breach of contract, can be settled by way of any legally binding written or oral contract, certain statutory employment rights and discrimination claims can only be settled via a Manx Industrial Relations Officer (“IRO”) under their statutory powers of conciliation[1]. This will entail the IRO meeting or having a telephone consultation with the employee to go over the terms of the agreement.

The IRO is independent and will explain to the employee the legal implications of entering into the compromise agreement and, in particular, that the employee will be prevented from bringing claims in the employment tribunal. The IRO will not offer a view on whether the settlement terms represent a “good” or “bad” bargain for the employee (other than to note if any due contractual or statutory payments have been omitted or are wrongly stated).

Once the employee and the IRO have signed the agreement and the employee/IRO produces a signed counterpart to the employer, it generally follows that the employer will be asked to forward its signed counterpart (or sign the one document executed by the employee and countersigned by the IRO). This will complete the agreement and make it binding on the parties. Aside from payment of termination sums and processing the employee as a leaver, the process is at this point concluded.

What to include in a compromise agreement

We have prepared a checklist of questions which we have found helpful when drafting a compromise agreement bearing in mind that there are a number of optional clauses and provisions which may be helpful to the employer, particularly as regards clarifying the parties’ responsibilities and putting detail around the employee’s exit arrangements.

Reference:-

[1] Section 157 Employment Act 2006 and Section 104 of the Equality Act 2017