Settlement agreements are essential tools for employers to resolve disputes and manage employment terminations on mutually agreed terms. However, recent developments in UK employment law require businesses to review and update their settlement agreement templates to ensure they remain legally compliant and effective in managing potential risks.
Key legal developments
Recent changes in UK employment law have primarily impacted two critical areas of settlement agreements: the waiver of potential future claims and clauses concerning data subject access requests (DSARs).
Waiver of future claims: Any clause intended to waive future claims must now include a general description or reference to the statute that gives rise to the relevant claims. The language used must be clear and unambiguous to ensure enforceability and prevent misinterpretation.
Data subject access requests (DSARs): Settlement agreements can no longer restrict the rights of departing employees to submit DSARs. Although certain measures, such as confidentiality clauses, are still permissible, many existing templates may not address these changes adequately, leaving businesses exposed to potential challenges.
Legal compliance and best practices for settlement agreements
For a settlement agreement to be legally binding, it must meet specific requirements under UK employment law. This includes being in writing, relating to specific complaints or proceedings, and ensuring the employee receives independent legal advice. Given the recent changes, it is crucial for businesses to:
Conduct regular reviews: Regularly review settlement agreement templates to ensure they reflect current legal standards and align with internal policies and procedures.
Seek independent legal advice: Engage experienced legal professionals to review and update templates to ensure they meet the new requirements.
Implement best practices: Use clear and precise language to define the waiver of claims, address excluded claims, and confirm that legal advice has been provided.
Practical steps for employers to maintain compliance
To remain compliant and mitigate potential risks, employers should undertake the following steps:
Conduct an immediate review: Assess existing settlement agreement templates to identify areas that require updates in light of recent legal changes.
Update clauses impacted by new regulations: Ensure that waivers of future claims include a general description of the relevant statute and that DSAR-related clauses are aligned with current legal standards.
Implement new templates and guidelines: Develop new templates or modify existing ones to incorporate updated legal requirements and internal best practices.
Consider using COT3 agreements: COT3 agreements, which are conciliated by ACAS, may offer broader waivers than standard settlement agreements and are particularly useful for addressing unknown future claims.
Key components of a comprehensive settlement agreement
To ensure settlement agreements are robust and legally enforceable, they should include the following components:
Termination details: Clearly specify the notice period, last working day, and any handover responsibilities.
Compensation: Outline the settlement payment, payment schedule, and continuation of benefits.
Confidentiality and non-disparagement: Include clauses on non-disclosure of agreement terms and mutual non-disparagement to protect reputations.
Waiver of claims: Address the waiver of claims, excluded claims, and confirm legal advice has been provided.
References and additional clauses: Provide a standard reference letter, tax indemnity provisions, return of company property, legal fees contribution, and governing law.
Mitigating potential risks and ensuring compliance
Employers should be mindful of potential risks associated with settlement agreements, such as the perception of unfairness, legal challenges, and impacts on employee relations. To mitigate these risks, businesses should:
Ensure fairness and transparency: Provide adequate compensation and engage in open communication to maintain trust and prevent disputes.
Include mechanisms for additional protection: Consider adding clawback provisions or reaffirmation letters to bolster protection under the settlement agreement.
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