Settlement Agreements

Unfortunately sometimes things go wrong in the working relationship and it is necessary to part company with one of your employees. Settlement Agreements (formerly Compromise Agreements) can often be a neater and tidier way of resolving the issues than going through a disciplinary procedure or grievance process

They can also be effective when the employment relationship has come to an end and the former employee is threatening to sue the business.

Settlement Agreements are legally binding agreements under which the employee receives an enhanced financial package in return for waiving their right to sue their employer. The employee must seek independent legal advice but as long as the employee and the adviser sign, then the agreement can help shortcut potentially antagonistic and time consuming disputes.

How can we help you?

If you are considering offering a Settlement Agreement please do contact our Employment Law Team who regularly advise on the drafting and negotiating of Settlement Agreements on behalf of businesses. 

Frequently Asked Questions

A Settlement Agreement is a legally binding, voluntary contract between an employer and an employee.

By signing a Settlement Agreement, the employee waives the right to bring a claim against the Company in the Employment Tribunal, in return for an enhanced payment.

A Settlement Agreement is usually used to terminate the employment relationship on mutually agreed terms. It can also be used where the employment is ongoing, but both parties want to settle a dispute that has arisen between them and bring the relationship to a quick end on agreed financial terms.

For the Settlement Agreement to be valid and legally binding, it must meet a number of statutory requirements, as follows:

• It must be in writing
• It must be signed by both the employer and the employee
• The employee must have received independent legal advice
• The legal adviser must be identified and insured and must sign an Adviser’s Certificate
• It must state that the applicable statutory regulatory conditions have been met

The Settlement Agreement should include a clause containing a clear breakdown of the payments to be made which may include:

- A ‘compensatory’ or ‘termination’ payment, for loss of employment
- A payment in lieu of notice
- A payment for accrued but untaken holiday up to the termination date

There is no set scale of payments and the amount of any compensatory payment will depend upon the individual circumstances of the case and the potential claims the employee may have against the Company.

The terms of the Settlement Agreement will be set out clearly in the written document which will identify the claims the employee is agreeing not to pursue in exchange for an enhanced package.

Other terms which are commonly agreed as part of a Settlement Agreement include:

- An agreed reference for prospective employers;
- An agreed internal announcement to the rest of the workforce.
- Outplacement support such as help with interviewing skills and drafting their CV;
- Release from any post-termination restrictions;
- A confidentiality clause around the terms of the Settlement Agreement;
- A warranty by both parties not to make any derogatory comments about the other party.

Most Settlement Agreements are intended for the employee to waive all potential claims they could bring against the Company. We can assess the strength of any potential claim the employee may have, the prospects of the employee succeeding at a Tribunal and the likely compensation they would be awarded.

It is a legal requirement to receive independent legal advice on the terms and effect of a Settlement Agreement before signing it.

The employer is generally expected (but not legally required) to make a contribution towards the employee’s legal fees in seeking independent legal advice on the terms and effect of the Settlement Agreement. Depending on the complexity of the circumstances leading to the offer, and the terms within the Agreement, the employer’s contribution (generally around £500 plus VAT is usually sufficient to cover the legal adviser’s costs. You are only required to contribute towards the employee’s legal fees if they sign the Agreement.

As a general rule, you should give the employee a minimum of 10 days to decide whether to accept a Settlement Agreement. Any demand on an employee to sign the Agreement immediately, may be seen to be improper behaviour and invalidate the terms of the Agreement.