Settlement Agreements cannot settle unspecific future claims

Employment law prohibits general full and final claims settlement clauses in settlement agreements being effective to resolve statutory employment claims. This is in order to protect employee claimants from signing away their rights without properly understanding what they are doing. However, settlement agreements resolving specific and current statutory employment claims are permitted, provided that they are operated in the prescribed statutory manner. 

In a recent Employment Appeal Tribunal (EAT) case, a former employee who had been dismissed for redundancy signed a statutory form settlement agreement at a time when he expected to receive an additional collectively agreed payment. He was later deprived of the additional payment by a decision made by the employer because of his age. That decision was made and communicated to the former employee after the settlement agreement was signed. The employee then sought to bring an age discrimination claim based on the removal of the additional payment, which the employer defended on the basis that such a claim had been settled by the general discrimination claims settlement terms in the settlement agreement. The EAT decided that a general provision in a settlement agreement as to potential age discrimination claims was ineffective. This was because it was not possible for the employee to sign away his right to bring an age discrimination claim before he knew that he had one. 

This decision was made on the basis that employment statutes state that settlement agreements can only effectively settle ‘a particular complaint that has already arisen between the parties to that complaint’. The EAT also said that the words ‘already arisen’ mean that a right to claim has already emerged. Therefore, possible future statutory employment claims cannot be settled by general, unspecific terms in statutory form settlement agreements.

This EAT decision casts doubt on other case law which allows ‘potential’ (rather than actual) employment statutory breach complaints to be settled by a settlement agreement, provided either the nature of the claim or the employment statute section relied on is stated in that settlement agreement. However, it is suggested that the difference between these two lines of cases arises because that other case law emerges from broader contractual settlements rather than from the restricted settlements permitted under employment statutes which applied in this EAT case. This distinction does explain why we may not yet see an entirely new approach to the formulation of settlement agreements. The difference also contributes unwelcome uncertainty for employers. 

The EAT in this case accepted that its conclusion may be inconvenient where there is a mutual desire to use a statutory form settlement agreement to avoid future claims and a wish to end the employment relationship permanently. In this case, the prospect of a future age discrimination claim was insufficiently certain to come within more general terminology in a qualifying legal settlement agreement. Therefore, it could not effectively settle the specific age discrimination claim that arose several months later.

This case is a timely reminder of the limitations of statutory settlement agreements to provide a comprehensive clean break settlement for employers. 

Employers who ensure their settlement agreements cover existing and specific statutory employment claims that have already arisen will find settlement agreements to be the more effective for them. 

The advice to employers remains that, when you make employment settlement payments over and above your contractual employment obligations, entering into a statutory form settlement agreement to settle statutory employment claims remains a wise precaution where no claim has yet been notified to Acas. (There is the additional and potentially wider claim settlement option of a COT3 (Acas- conciliated form settlement) where Acas has been notified of a claim or where a claim has been formally commenced in the Employment Tribunal). 

More precision as to the current specific claims to be settled by a statutory form employment settlement agreement remains the better course in terms of legal effectiveness; whilst recognising that many employers find it highly unattractive to sign (even confidential) settlement agreements which record that employment claims have arisen against them. 

If you are an employer looking to minimise the risk of employment claims from exiting employees, please contact Charlie Barnes.