Settlement agreements are a cornerstone of resolving employment disputes in the UK. They offer a clean break, allowing both employer and employee to move forward without the time, expense, and stress of litigation. But what happens when one party doesn’t hold up their end of the bargain? A breach of a settlement agreement can unravel this carefully constructed peace, plunging both parties back into conflict. This guide explores the intricacies of what constitutes a breach, the significant consequences that can follow, and the legal remedies available to the wronged party. 

Before delving into the complexities of a breach, it’s essential to understand the nature of a settlement agreement. Formerly known as a compromise agreement, a settlement agreement is a legally binding contract between an employer and an employee. It’s typically used to resolve a workplace dispute, often in the context of termination of employment. In exchange for a sum of money and, often, other benefits such as an agreed reference, the employee agrees to waive their right to bring certain legal claims against the employer. These claims can range from unfair dismissal and discrimination to breach of contract. 

For a settlement agreement to be legally binding, it must satisfy several statutory requirements. It must be in writing, relate to a specific complaint or proceedings, and the employee must have received independent legal advice on the terms and effect of the agreement from a qualified legal adviser. The agreement must also identify the adviser and state that the conditions regulating settlement agreements have been met. This ensures that the employee understands the rights they are giving up and is not coerced into signing. Once signed, the settlement agreement becomes a legally enforceable contract, and both parties are bound by its terms. 

A breach of a settlement agreement occurs when either the employer or the employee fails to comply with one or more of its terms. Breaches can vary in severity, from minor infringements to significant violations that undermine the entire agreement. 

Common breaches by an employer include: 

• Failure to pay the settlement sum: this is perhaps the most common and clear-cut breach. The employer may fail to pay the agreed amount on time, or at all. 

• Providing a negative or inaccurate reference: settlement agreements often include a clause specifying the wording of a reference the employer will provide. Deviating from this agreed-upon reference can constitute a breach. 

• Failing to honour other agreed terms: this could include failing to continue benefits for an agreed period, not allowing the employee to keep company property as agreed, or breaching a confidentiality clause. 

Common breaches by an employee include: 

• Breaching confidentiality: settlement agreements almost always contain a confidentiality clause, also known as a non-disclosure agreement (NDA), preventing the employee from discussing the terms of the agreement or the circumstances surrounding the dispute. A breach of this clause is a serious matter. 

• Making disparaging remarks: many agreements include a non-disparagement clause, which prohibits the employee from making negative comments about the employer, its employees, or its business. 

• Pursuing waived claims: the core of a settlement agreement is the employee’s waiver of their right to bring legal claims. If the employee subsequently tries to bring a claim that was covered by the agreement, this is a clear breach. 

• Failing to return company property: if the agreement requires the employee to return company property, such as a laptop or a mobile phone, failing to do so constitutes a breach. 

It is important to distinguish between a material breach and a minor breach. A material breach is a serious violation that goes to the heart of the contract, effectively depriving the innocent party of the main benefit of the agreement. A minor, or non-material, breach is a less serious violation that does not fundamentally undermine the agreement. The distinction is crucial, as it affects the remedies available to the wronged party. 

A breach of a settlement agreement is not a one-way street; both employers and employees can face significant consequences for failing to adhere to the terms. 

Consequences for the Employer 

If an employer breaches a settlement agreement, the employee has several potential courses of action. The most common is to bring a claim for breach of contract in the civil courts to recover the unpaid settlement sum and any other quantifiable losses. The employee may also be able to argue that the employer’s breach is repudiatory, meaning it is so serious that it terminates the entire agreement. If a court agrees that the breach is repudiatory, the employee may be freed from their obligations under the agreement and could potentially revive the original claims that were settled. This is a significant risk for the employer, as it could expose them to the very litigation the settlement agreement was designed to avoid. 

Consequences for the Employee 

An employee who breaches a settlement agreement can also face serious repercussions. The employer can sue the employee for breach of contract to recover any losses they have suffered as a result of the breach. For example, if the employee’s breach of a confidentiality clause causes reputational damage to the employer, the employer could seek damages to compensate for that harm. 

Many settlement agreements include a repayment clause, which states that if the employee breaches certain terms of the agreement, they must repay all or part of the settlement payment. However, these clauses are not always enforceable. A court will only uphold a repayment clause if it is a “genuine pre-estimate of loss” and not a “penalty clause” designed to deter a breach. It is more common for settlement agreements to include an indemnity clause, where the employee agrees to reimburse the employer for any losses incurred as a result of their breach. 

If the employee’s breach is material, the employer may be able to treat the contract as terminated. This would mean the employer is no longer bound by its own obligations under the agreement, such as providing an agreed reference. 

When a breach of a settlement agreement occurs, the wronged party has several legal remedies available to them. 

• Damages: this is the most common remedy for a breach of contract. The aim of damages is to put the innocent party in the position they would have been in had the contract been performed correctly. For an employee, this would typically mean recovering the unpaid settlement sum. For an employer, it could mean recovering losses caused by the employee’s breach. 

• Specific Performance: this is a court order that compels the breaching party to perform their obligations under the contract. This remedy is less common and is only granted in specific circumstances where damages would not be an adequate remedy. 

• Injunction: an injunction is a court order that prohibits a party from doing something. An employer might seek an injunction to prevent an employee from further breaching a confidentiality or non-disparagement clause. 

• Termination: as discussed earlier, a serious (repudiatory) breach may give the innocent party the right to terminate the contract and, in some cases, revive the original claims. 

A settlement agreement is a valuable tool for resolving employment disputes, but its effectiveness hinges on the commitment of both parties to uphold its terms. A breach of a settlement agreement can have serious and costly consequences, unravelling the certainty and finality that the agreement intended to provide. 

If you believe that the other party has breached your settlement agreement, it is crucial to seek legal advice promptly. An experienced employment solicitor can advise you on the best course of action, whether that involves negotiating a resolution, sending a formal letter before action, or pursuing a claim in the civil courts. Ultimately, understanding the gravity of a breach and the remedies available is the first step in protecting your rights and ensuring that the terms of your settlement agreement are honoured.