What is a Settlement Agreement?

A settlement agreement is an agreement between an employee an employer to end the employment contract under mutually agreeable terms. It usually means that the employee will give up the right to bring any kind of tribunal claim against the employer in return for a severance payment.

Settlement Agreement

This type of agreement used to be called a compromise agreement. However in July 2013 the law changed and a compromise agreement must now be referred to as a settlement agreement. The change was largely cosmetic with the major change being that it can be offered to the employee even if there wasn’t an ongoing dispute between the parties. Compromise agreements could only be offered if there was an ongoing dispute within the workplace.

Key points about Settlement Agreements

  1. They must be in writing;
  2. In most cases they include some kind of payment to the employee and possibly a reference;
  3. The contract is legally binding and means that the employee is then unable to make any form of claim against their employer in tribunal or court;
  4. They are voluntary and you don’t have to accept them – i.e. the agreement must be mutual;
  5. They can be offered at anytime during your employment.

Why are they used?

They can be used at anytime during an employment relationship and can be offered by employer or employee (but more often than not it is the employer that does the offering.) They are usually used when the employment relationship has broken down, for example if there is some sort of ongoing dispute in the workplace.

Under the new regime any private discussions between the employer and the employee cannot subsequently be used by the employee as evidence in any unfair dismissal claim.

How can an agreement be reached?

In order for an agreement to be reached there are several things that need to happen.

  1. The agreement must be in writing;
  2. The agreement must relate to the dispute or reason for proceeding;
  3. The employee must be allowed to get advice on the terms and effect of the agreement from a legal representative. This is usually paid for by the employer;
  4. The adviser must be named in the agreement.

The employee should be given reasonable time to consider the agreement and be allowed to consult with their chosen legal adviser on the terms of the agreement.

A settlement agreement is entirely voluntary and an employee does not have to agree to it or even enter into discussions or negotiations about them if they do not wish too.

The settlement agreement meeting

Unfortunately, there is no obligation on the employer to allow the employee to have a representative at the meeting. However in the majority of cases the employer does allow either a work colleague or union rep to attend the meetings as it tends to progress to a swift agreement and conclusion to proceedings.

What do they contain?

The agreement usually contains several standard sections. These include:

  1. Outstanding salary and holiday pay (this is tax deductible);
  2. Ex-gracia Payment – this is usually pay that the employee will receive as compensation for their loss of employment. The payment is tax free up to £30,000;
  3. Waiver of Claims against the employer;
  4. Confidential Information – this is where the employer/employee agrees not to disclose information within the agreement to third parties.

Why do you I need a legal adviser?

It is important that the employee gets legal advice on a settlement agreement to ensure that they fully understand the implications of signing away their right to issue a claim to a tribunal and that they are receiving the correct compensation based on length of employment, salary and other factors.

What if an agreement cannot be reached?

If an agreement cannot be reached then there are other options available to the employer may use other method to resolve the dispute, for instance:

  1. Performance Management;
  2. Disciplinary;
  3. Grievance;
  4. Mediation.

However if these routes are pursued and the employer does not carry out procedures correctly it may be possible for the employee to bring an unfair dismissal claim against them.

Video Explainer

Please see our video explainer on settlement agreements below.

What now?

If you have been offered a settlement agreement, please contact us today. You will be able to speak to one of our no win no fee employment solicitors who will be able to advice you what to do next. Please schedule a call or call us on 0800 756 6605