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What are your compliance obligations regarding settlement agreements?

Peter McDermott

For many employers, settlement agreements are a quick, easy and cost-effective way to terminate an employee's tenure. Few realise that these settlements may very well turn out to be much more costly than they ever imagined.

When I say 'settlement agreement' in this context, I'm not referring to a CCMA-mediated conciliation outcome. I'm referring to:

  • An agreement between an employer and employee where the parties agree to end their relationship – often without being in strict compliance with the Basic Conditions of Employment (BCEA) or the employment contract.

The unenforceable nature of a settlement agreement was argued in the case of Ferguson v Basil Read (Pty) Ltd [2013] BLLR 274 (LC):

  • The applicant, Ferguson, was offered a settlement agreement as an alternative to retrenchment.
  • The agreement was to be in full and final settlement of all claims arising from the employee's employment, termination of service and it granted the applicant:

- Two weeks' pay,

- One month's notice pay, and

- An ex gratia payment of R5 000.

  • After signing this agreement, the applicant discovered that his company had just been awarded a new project, making his retrenchment unnecessary.
  • Based on the company's alleged misrepresentation, the employee claimed that the settlement agreement was unenforceable.
  • The court had to decide if the parties had entered into a valid agreement in full and final settlement. If so, the employee couldn't be said to have been dismissed (unfairly or otherwise) and the matter would be closed.
  • If, however, the applicant had been induced to enter into the agreement by misrepresentation then the agreement would be void and no parties would have to be in compliance with it.
  • The company submitted that when the applicant signed the settlement, their project hadn't been finalised and future work for the applicant wasn't certain.
  • The applicant wasn't able to prove that the company had misled him and so the case was dismissed without further investigation.

What does this case show us?

A settlement agreement – even one that's in 'full and final settlement' and entered into willingly – is not immune to review and further investigation. Had Ferguson been able to show that he had been misled into signing the settlement agreement, it would've been set aside.

Learn this lesson and be exceptionally careful to vet the reasons you give employees when you design a settlement agreement.

How can you ensure that a settlement agreement is binding?

According to Greef v Consol Glass (Pty) Ltd (2012) 33 ILJ 1167 (LC):

  • Only settlement agreements that were concluded after a dispute had been referred to either the CCMA or the Labour Court are enforceable in terms of section 158(1)(c) of the Labour Relations Act.

Luckily this ruling was set aside last year when the Labour Appeal Court held that settlement agreements meeting the section 158(1A) requirements would be enforced – but at the court's discretion.

Settlement agreements should always:

1. Be in writing,

2. Be signed by both parties,

3. Be witnessed by at least one witness,

4. Specifically state that it's in full and final settlement of any and all claims arising from the employee's employment and/or relationship with the employer and/or termination of employment,

5. State that the employee consents to the employer approaching the Labour Court to have the agreement made an order of court in terms of s158(1)(c).

Peter Mcdermott

Peter did a Bachelor of Technology (B.Tech), Human Resources Management and Services at Technikon Witwatersrand (1994-1998) and an Advanced Diploma – Labour Law, Law at University of Johannesburg (2001-2002).

He joined Labour Net in 1997 and was a consultant there until 2000, and has been a director and shareholder in Invictus Outsourcing Solutions since November 2001.

Peter has gained extensive knowledge and experience over the past 17 years in dealing with various Human Resources (HR) and Industrial Relations (IR) matters, including but not limited to :

  • Bargaining Council
  • Black Economic Empowerment (BEE)
  • CCMA
  • Contracts of Employment
  • Corporate Law
  • Disciplinary Procedures
  • Dismissals
  • Dispute Resolutions
  • Employment Equity (EE)
  • HR Policies and Procedures
  • Labour Court
  • Labour Relations
  • Negotiations
  • Performance Management
  • Personnel Management
  • Policies and Procedures
  • Retrenchments
  • Skills Development (SD)
  • Strikes
  • Talent Management
  • Trade Unions