When resolving a dispute with an employee, employers should be mindful of the claims which typically cannot be waived under a settlement agreement. This update summarises the limitations on waivers under a settlement agreement and the claims which are customarily carved out from the waiver, as well as some commonly used mechanisms to mitigate these risks.
Key requirements
For a settlement agreement to be binding, certain conditions under the Employment Rights Act 1996 (“ERA“) must be complied with, including that the agreement is in writing and the employee has obtained legal advice from an independent advisor. Importantly, a settlement agreement must relate to either a “particular complaint” or “particular proceedings”.
Limitations
Whilst an employer will want to obtain a comprehensive waiver of all existing and future claims that the employee may have against it, there are limitations on the types of claims that can be waived under a settlement agreement.
Unparticularised claims
A settlement agreement which simply waives “all claims and rights of action” the employee has or may have against the employer will not meet the requirement for it to relate to a “particular complaint” or “particular proceedings”. For this reason, settlement agreements commonly contain a list of the most obvious claims the employee may have (by reference to the relevant legislation where appropriate) in the main body of the agreement, with a more comprehensive list of all statutory claims in a schedule.
Unknown existing claims
There may be circumstances in which a statutory claim exists at the time a settlement agreement is signed but is not discovered until later. A recent Court of Appeal decision Arvunescu v Quick Release (Automotive) Ltd (2022) determined that in the context of an ACAS COT3 agreement, an unknown existing claim could be waived by the agreement. The Court of Appeal found that the claim fell within the scope of the waiver and had therefore been settled by the COT3, emphasising the fact that the COT3 included clear language reflecting an intention to resolve claims arising “indirectly… in connection with… the employee’s employment“.
Whilst Arvunescu concerned a COT3 rather than a settlement agreement, the case was applied by the Employment Tribunal in Clifford v IBM (2022) which concerned a settlement agreement.
Unknown future claims
The position is more nuanced when dealing with unknown future claims – that is, claims the parties may not be aware of when the settlement agreement is signed and which only arise after the fact. Case law has been relatively uncertain on this issue, but in the recent decision of Bathgate v Technip Singapore PTE Ltd (2023), the Court of Session in Scotland confirmed that a settlement agreement may be used to waive an unknown future claim where it is “plain and unequivocal” that this was intended. Whilst not binding on courts in England and Wales, this decision is persuasive and seems likely to be followed.
Statutory claims
There are a number of statutory claims which cannot be waived under a settlement agreement, the most common being:
- Certain claims under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (“TUPE“) including the failure to inform and consult and the failure to provide employee liability information;
- Certain claims under the Trade Union and Labour Relations (Consolidation) Act 1992 (“TULRCA“) for failure to inform and consult with appropriate representatives on collective redundancies;
- Certain claims under the Agency Workers’ Regulations 2010 (“AWR“) including those in relation to breaching rights to basic working and employment conditions and access to vacancy information;
- Claims in respect of the right to receive statutory sick pay (“SSP“), statutory maternity pay (“SMP“), statutory paternity pay (“SPP“), statutory adoption pay (“SAP“), statutory shared parental pay (“SSPP“) and statutory parental bereavement pay (“SPBP“); and
- Certain claims under the Data Protection Act 2018. Whilst it is unlikely that an employee can legally contract out of their rights under the Data Protection Act (including rights to make future data subject access requests (“DSARs“)), it is common for employers to stipulate that employees withdraw any previously submitted DSARs as a condition of payment under the agreement. However, this will not necessary preclude an employee from lodging a similar if not identical DSAR in future.
Pensions and personal injury claims
The Pensions Act 1995 precludes the waiver of claims in respect of accrued pension rights, primarily because the rights are typically owed by trustees of the pension scheme, who are not party to the settlement agreement. There are limited exceptions to this exclusion for parties attempting to resolve rights related to an occupational pension which are in dispute.
An employer cannot ask an employee to waive their right to a future claim for personal injury of which they are unaware. Such a waiver would likely contravene the Unfair Contract Terms Act 1977 as well as potentially the Law Reform (Personal Injuries) Act 1948.
Personal injury claims under discrimination legislation can be covered by the applicable waiver in the agreement (i.e., the right to bring discrimination and harassment claims). Additionally, a personal injury claim which the employee is aware of can be waived, subject to clear provisions in the agreement regarding the injuries which are to be covered.
Claims in other jurisdictions
Where an employee has dual employment rights, an employer should be mindful that a UK settlement agreement may not meet the prescribed form or requirements to waive claims in other jurisdictions. This will be particularly relevant for internationally mobile or peripatetic employees who also qualify for mandatory employment protection rights in other jurisdictions outside of the UK.
Waiving claims under a COT3 Agreement
It is important to remember that some of the limitations which apply to settlement agreements do not apply to a waiver of claims under a COT3 conciliated by ACAS. For example, a COT3 can settle:
- Unknown existing and future statutory employment claims;
- Certain claims brought under TULRCA, TUPE and AWR as mentioned above.
Confidentiality and Non-Disclosure Agreements
It is common for a settlement agreement to include a provision that the parties agree to keep the existence and terms of the agreement and the circumstances concerning the termination of the employee’s employment (including settlement negotiations) confidential. There are various exceptions to the confidentiality obligations which include:
1. for an employee to make a protected disclosure or to make a disclosure to a regulatory body regarding misconduct, wrongdoing or serious breach of regulatory requirements;
2. reporting a criminal offence to and cooperating with any law enforcement agency regarding criminal investigations or prosecutions;
3. for the employee to seek tax or other professional advice (including medical advice);
4. for relevant insurance claims regarding loss of employment;
5. disclosure to a government benefits agency for the purpose of claiming benefits; and
6. to allow the employee to discuss the matter with a partner or immediate family member provided they agree to maintain the same level of confidentiality.
The use of NDAs in settlement agreements remains under scrutiny (particularly in relation to sexual harassment and whistleblowing cases), both politically and from regulatory bodies including the Solicitors Regulation Authority, the Financial Conduct Authority and Prudential Regulation Authority, and advice should be taken on a case by case basis.
Additional mechanisms to consider
In light of the limitations listed above, employers may wish to consider additional mechanisms to bolster protection under a settlement agreement, including:
1. Apportionment of payments: where a commercial settlement package includes any element of SSP, SMP, SPP, SAP, SSPP and SPBP, ensure that this payment is clearly identified in the agreement rather than intermingled with other termination payments.
2. Warranties: The employer may require a warranty from the employee that the claims set out in the agreement are the only claims that the employee has, and that the employer is relying on this warranty as a condition of entering the agreement.
3. Clawback: A clawback on payments can be drafted into the agreement which is triggered if the employee is in breach of the agreement or attempts to bring a claim against the employer after execution of the agreement.
4. Withholding future payments: In a similar spirit to a clawback, an agreement may allow the employer to withhold a portion of the ex-gratia payment until after the limitation period has expired, and make it conditional on the employee having not brought any claims against the employer up until that point.
5. Employee indemnity: The employer could also include a requirement for the employee to indemnify the employer for any breaches of the agreement or if they bring a claim which causes the employer to suffer loss.
6. Reaffirmation letter: Execution of a reaffirmation letter can be used by an employer where there is a significant gap in time between signing of the settlement agreement and termination of employment during which the employee could bring additional claims. A reaffirmation letter is effectively a restatement from the employee of the waivers and warranties in the agreement (usually within 7 days of the termination date). Employers will often make the termination payment conditional on receipt of the signed reaffirmation letter. Note that the employee is required to get legal advice on the terms and effects of the reaffirmation letter (as they would for a settlement agreement) and provide a copy of a signed legal adviser’s certificate confirming this.
Careful thought should go into the application of these mechanisms depending upon the specific circumstances of the settlement and to ensure that they do not contravene statutory or common law principles (such as the rule against penalty clauses).
Key takeaways
Employers should avoid adopting a one size fits all approach when drafting waivers under a settlement agreement, and ensure that each case is dealt with on its facts and tailored to the employee in question. Case law emphasises the need to use clear and specific drafting which captures the claim(s) which exist at the date of the agreement and/or are likely to arise after an agreement is reached.
If you would like advice on any issues addressed in this bulletin, please contact a member of our team.