The Number One Flaw in Settlement Agreements

Whilst the sources do not explicitly rank mistakes in order of frequency, the most heavily emphasised error in employee / employer settlement agreements is the failure to properly identify and specify the claims being waived.

Settlement agreements that use overly general or catch-all waivers without clearly identifying particular statutory claims risk being declared invalid. And invalidity opens the door to future claims, professional embarrassment and HMRC.

The requirement to clearly identify the claims being settled is a fundamental statutory condition that is frequently missed.

Under section 203(3)(b) of the Employment Rights Act 1996 and equivalent provisions in other employment statutes, a settlement agreement must relate to a particular complaint or particular proceedings.

General or catch-all waivers such as "all statutory claims" are not sufficient to satisfy this requirement.  Many agreements refer to employment ending by ‘mutual agreement’ or some other, probably well-intentioned euphemism. Isn’t it far better to say we parted by mutual agreement instead of ‘we sacked you for misconduct on shaky grounds’?  Well yes, but then the agreement isn’t binding.

To satisfy the statutory requirement and constitute a binding waiver, a settlement agreement must clearly identify the statutory claims being settled through a two-stage process: first, the agreement must be sufficient to cover the relevant claim under ordinary rules of contractual interpretation, and second, it must comply with section 203, as above.

The particular or potential claims covered must be identified either by a description such as "the claims of unfair dismissal raised by the employee in their letter of …" or by reference to the section of the statute giving rise to the claim. It may not be sufficient to identify only the statute, for example ‘the ERA 1996’, since many types of claim might arise under that one statute.  Far better to quote the exact provision, or simply set out the narrative of the claim for the avoidance of doubt.  Either way, the potential statutory claims should be well known by advisers.

There is a purpose to this requirement after all; it is to protect employees from signing away their rights without a proper understanding of what they are doing.  For that reason, a blanket settlement agreement compromising claims which have never been indicated in the past, is not enforceable.

Whilst case law suggests that general waivers of all statutory claims are not effective, it remains common practice for employers to include a catch-all waiver of statutory claims at the start of the waiver clause, but the employer must ensure that any claims it knows are relevant to the employee are specified separately, and ideally the employee's adviser should tailor the list of claims as appropriate.

I must have written to ‘opponents’ over a hundred times about this issue, and yet it still crops up on an almost weekly basis.

If you see it, you know where I am.