Settlement Agreements and Independent Legal Advice

What is a ‘Settlement Agreement’?

Often referred to as ‘exit agreements’, ‘compromise agreements’, or ‘termination agreements’, a settlement agreement records the final and agreed terms between a departing employee and his or her employer.

The main legal impact of a settlement agreement is that it will prevent an employee from bringing any future claim against the employer. The consequences of such an agreement cannot be overstated, particularly if there is or was a dispute between the parties.

Independent legal advice, prior to the execution of a settlement or exit agreement, is designed to ensure that the employee concerned, is fully appraised, of the consequences of signing the agreement.

However, is independent legal advice always required?

Case Law on Settlement Agreements and Independent Legal Advice

The leading authority in relation to agreements which compromise employment statutory rights is Sunday Newspapers Ltd -v- Stephen Kinsella and Luke Bradley (2008) 19 E.L.R. 53. In that case, former employees who had entered into severance agreements sought to pursue complaints under the Protection of Employees (Fixed-Term Work) Act 2003 arguing that a waiver of their rights under the Act was void. In the High Court, Smyth J. allowed an appeal against the Labour Court making a number of generic findings with reference to decided caselaw. 

Firstly, he confirmed that an employee could enter into an agreement in relation to his or her statutory rights and the question of whether or not such rights had been compromised was a matter for the proper construction of the agreement itself. 

Secondly, he adopted Hurley -v- Royal Yacht Club [1997] E.L.R. 225 which considered the circumstances where claims can be legitimately compromised and held that an employee being offered a severance package was entitled to be advised of his entitlements under the employment protection legislation and any agreement or compromise should list the various applicable statutes or at least make it clear that they had been taken into account by the employee. 

In addition, an employee should be advised in writing to seek appropriate advice as to their rights and in the absence of such advice, a severance agreement waiving statutory rights would be void. 

Recognising the need to enable parties to enter into settlement agreements, this Judgment was recently approved by the High Court in Board of Management of Malahide Community School -v- Conaty Irish Employment Law Journal 2019, 16(3), 85-87 so long as there is informed consent. 

In Irish Life Assurance PLC -v- John Healy EDA 1514 (2016) 27 E.L.R. 211, the Labour Court held that the doctrine of promissory estoppel applied. Having entered into and acted upon a financial settlement of High Court Proceedings with the benefit of legal representation which compromised and waived all claims arising from the claimant’s employment with the respondent, the claimant was deemed to be estopped from pursuing a subsequent complaint under the Employment Equality Acts. 

Workplace Relations Commission Complaints and the existence of a Settlement Agreement

The case of A Customer Success Guru -v- An Ecommerce Company provides a useful summary of the position of the Workplace Relations Commission (WRC) with respect to settlement agreements and the bringing of a claim.

Given the unequal positions of strength between employers and employees and protective nature of employment statutes many of which contain non-waiver provisions, an examination of the circumstances surrounding an agreement compromising same requires close scrutiny. Applying the undisputed facts to the principles elucidated in the aforesaid caselaw, the WRC will generally construe a settlement agreement as full and final resolution of any existing and potential claims arising from the parties’ employment relationship.

Settlement Agreement and Informed Consent

The WRC will need to be satisfied that there was informed consent. Does the agreement advise the employee in writing to seek legal advice as to his/her rights and contain an acknowledgement that he/she had availed of such advice by signing the agreement? 

Duress to sign a Settlement Agreement?

Is there evidence of oppression or undue pressure being brought to bear amounting to duress? Did the employee have an opportunity to consider his position and avail of appropriate advice before signing the agreement and it was open to him to reject the offer and pursue a complaint to the WRC instead.

Did Employer and Employee execute the Settlement Agreement?

Ultimately, did both parties act upon the agreement with the employee paying over the ex gratia sum and by the employee accepting same. 

If each of these conditions are satisfied, the employee will be estopped from pursuing a complaint under and the WRC will not have jurisdiction to adjudicate on the substantive complaint.

The requirement for Independent Legal Advice

The Labour Court recently held an appeal by a worker against the decision of the Adjudication Officer to the Labour Court in accordance with Section 9(1) of the Unfair Dismissals Act. The Adjudication Officer decided that a ‘Terms of Settlement’ agreement reached between the parties upon the termination of the employee’s employment amounted to a waiver entered into by the employee such that that he had accepted terms in full and final settlement of all claims against the employer and waived his rights under employment legislation specified in the agreement. The Act was identified in the agreement as legislation in respect of which the employee waived his rights. It was submitted that while the employee is an educated person, he is a Palestinian person whose first language is not English. He is not familiar with the common law system and has difficulty understanding Irish employment law and particularly so in the absence of legal advice. Having regard to the fact that employer placed sole reliance on the settlement agreement as a defence to the complaint, the Labour Court concluded that the dismissal of the employee was unfair.

The Takeaway

The key takeaway for employers is that they risk a potential claim if an employee executes a settlement agreement without independent legal advice.

The key takeaway for employees is that they may be entitled to bring a claim if independent legal advice was not offered, suggested or paid-for by their employer.