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Welcome clarity on employee settlement agreements

Thursday, March 26, 2015

In two recent decisions, both handed down in 2015, the employment tribunals have usefully reiterated the circumstances in which employment rights can be validly waived.


In commercial disputes, settlement agreements are commonplace and are relatively easy to put in place.  However, the courts and statutory tribunals have traditionally been reluctant to afford too much flexibility to employers when waiving employees’ rights.


That is obviously because of the potential for abuse.  Employment law is largely protective – a consistent theme throughout our employment law is that employment rights cannot be waived by the employee.  To take a simple example, if this could be done easily, there would be nothing to prevent an employee from waiving their right to work no more than 48 hours a week.


There are, however, many situations in which an employer will seek to draw a line in the sand.  The obvious – and most common – example is where the employer and employee have agreed to part company and a sum of money will change hands.


In those circumstances, it is critically-important that the employee’s right to bring a claim is waived.  Without this, there is nothing to prevent an employee from accepting a sum of money and still bringing a claim.  Without the protection of a settlement agreement, an employer would be dangerously exposed.


The courts have accepted that employment law rights can be waived in certain circumstances.  However, these are deliberately narrow.  To validly waive employment rights:

1. The employee must understand the implications of waiving their rights

2. The rights being waived must be specified (i.e. down to naming each piece of legislation)

3. The employee must benefit from independent legal advice


The two recent decisions of the EAT are of great assistance in understanding how these principles work in practice.


In the first decision, Kerrigan – v – Smurfit, an employee accepted a sum in excess of €25,000 in settlement of a dispute concerning alleged unfair dismissal for redundancy.  Despite this, the employee lodged a claim with the EAT.  The employer, understandably, attempted to rely upon the settlement agreement but it transpired that the claimant had neither received independent legal advice nor been advised that he should obtain independent legal advice.


In those circumstances, the EAT ruled that as the third element of the test referred to above had not been complied with, the settlement agreement was not binding.  The employee was awarded a further €10,000.  That is a costly lesson for an employer to learn and really cannot be underestimated as a stark example of why it is absolutely crucial to ensure that every element of the test is complied with.


The second decision demonstrates what can happen when an employer gets it right.  In this decision, an employee entered into a full and final settlement agreement which excluded all claims arising from his employment.


Again, the employee commenced proceedings (this time in the Equality Tribunal) but the Equality Officer pointed to the fact that the employee had received more than adequate legal advice.  In this decision, Healy – v – Irish Life , the employee did not succeed.  The Tribunal ruled that the stable door had been firmly bolted before the horse left.  The employee had signed a binding settlement agreement relying upon expert legal advice and the mere fact that he had changed his mind was not enough.


An employer ignores the lessons in these cases at their peril.  It is fair to say that there is very little ambiguity now about the (quite limited) circumstances in which employment rights can be waived and adhering to all elements of the test, as referred to above, is absolutely critical.


Patrick Walshe