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Settlement agreements can settle future employment claims

11 January 2024

In a helpful decision for employers, the Scottish Court of Session has ruled that a settlement agreement can be used to settle future as well as existing employment claims – even where those claims only arise after the agreement has been signed.

Our previous article Settlement agreements cannot settle future employment claims that have not arisen explained an Employment Appeal Tribunal (EAT) decision which limited the ability of employers to use settlement agreements to prevent future claims. The decision has now been reversed on appeal. This is a Scottish decision and therefore technically only persuasive rather than binding outside of Scotland. Nevertheless tribunals are very likely to follow it as the ruling resolves the position on a point on which there are conflicting EAT decisions.

Although this is good news for employers, who will want to ensure a settlement achieves finality in a dispute with an employee, careful drafting is still needed to ensure that any agreement is valid. This article explains the latest position and what employers should be doing now.

Dispute arose after settlement agreement has been signed

Statutory employment claims such as unfair dismissal, discrimination and deductions from wages cannot be settled, except through Acas conciliation or a valid settlement agreement. For a settlement agreement to be valid, it must (among other things) relate to the “particular” complaint. There is tension between the desire of the employer (and often both parties) to achieve a full and final settlement of all claims and the need for settlement agreements to focus on particular claims.

In this case, Mr Bathgate was a Chief Officer on board various ships who took voluntary redundancy under a settlement agreement. After the agreement had been signed, the employer decided it was not going to make a particular type of payment to officers over the age of 60. This meant that Mr Bathgate did not receive one of the payments he was expecting under the agreement. He claimed that this was age discrimination.

The Employment Tribunal decided that he couldn’t proceed with his claim because he had waived any age discrimination claims under the settlement agreement. The EAT reversed this decision, on the basis that settlement agreements could not settle future claims that had not arisen at the date of the agreement.

Court of Session decides that future claims can all be settled

The Court of Session disagreed with the EAT and found that the settlement agreement did prevent Mr Bathgate from bringing a claim for age discrimination. The fact that the alleged discrimination was not known about and did not happen until after the agreement was did not prevent those claims from being validly waived.

The key points from the decision are:

  • The statutory rules about settlement agreements do not prevent the settlement of future claims, so long as the types of claim are clearly identified and the wording in the agreement covers the relevant claim.
  • The requirement that the agreement must “relate to the particular complaint” does not mean that the complaint must have existed or been known of at the time of the agreement. But it does mean that the agreement must be specific: the particular complaint must be identified in the agreement, and a general blanket signing away of all employment claims will not work.
  • As it is possible to settle future claims in an Acas conciliation agreement, it is hard to understand why this should not be possible for settlement agreements which involve additional rules about requiring independent advice and insurance.

What does this mean for settlement agreements?

This decision is undoubtedly good news for employers as it makes it easier to achieve a clean break with employees after a dispute. There are a few things you should now be thinking about:

  • A settlement agreement is a practical option for a clean break with an ex-employee, covering both existing and future claims. It is now unlikely to be necessary to sign a second confirmatory settlement agreement if there is a delay between signature and the employee’s termination date in order to waive claims that arise in the intervening period. However, in some circumstances employers may still see the value in this kind of two stage agreement in order to incentivise “good behaviour” until the termination date. This may also be desirable from a tax perspective to ensure that it is clear the termination payment is paid in connection with the termination of employment.
  • It is still necessary for the wording of the agreement to be clear and cover the “particular” complaint in order for future claims to be covered. This can be done by listing all potential complaints in the agreement. It was previously understood that having a standard list of every type of employment claim in a waiver, even those which are only remote possibilities, might undermine the position that claims have been particularly identified. This judgment reduces this risk as it makes clear that the key to a valid settlement agreement is adequately identifying the legal claim being waived. This requirement is incompatible with a generic waiver, but not necessarily with a long list of statutory references. That said, removing reference to claims which are remote or even impossible for that employee, remains best practice.
  • Does this decision mean a settlement agreement could be signed part-way through or even at the start of employment, and cover all future claims which might arise?. The EAT was concerned about this possibility but it was not addressed in the Court of Session’s decision. However, even if this is now possible, it is unlikely that most employees would be willing to agree to such a broad waiver of future claims and in any event would create additional, potentially unnecessary, costs for employers.
  • Employee advisers will be focussing more closely on the specific claims that are being settled in the agreement, and both employees and their advisers are more likely to push back on clauses that try to settle all future claims. This means it will still be necessary to tailor each settlement agreement to the circumstances and likely claims.
  • An Acas conciliated settlement no longer has the advantage of being the only way to settle future claims. They still have the advantage, however, of being able to cover all claims over which Acas has power to conciliate, without the need to identify particular complaints or for the employee to obtain independent advice. Acas is also able to handle mass settlement exercises, which can be efficient for employers in collective processes This means that in some cases it may still be helpful to involve Acas instead of opting for a settlement agreement.

As this decision has such wide-ranging consequences it is possible that it will be appealed to the Supreme Court. In the meantime, this is a very useful confirmation of how parties to an employment dispute can achieve a clean break.

Bathgate v Technip Singapore PTE Limited – judgment available here.

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