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Employment Settlement Agreements

My employer has proposed a Settlement Agreement- what is this and why do we need it?

A settlement agreement is a contract between an employer and employee by which an employee signs away their right to bring any future claim against the employer when their employment is terminated. This used to be known as a compromise agreement.

Usually these settlement agreements arise where the working relationship has broken down and it can be used as a way of resolving any potential disputes rather than proceeding via an employment tribunal. They can also be used where there is a redundancy situation and an employer may be offering voluntary redundancy for example.

A Settlement Agreement often provides for a compensation or ‘termination’ payment in exchange for the employee agreeing not to pursue any other potential claims against the employer.

What is included in a settlement agreement?

There are various aspect of the agreement which must be in place in order for this to be valid.

  • The agreement must be in writing
  • The agreement must specify which potential claims the employee is surrendering (e.g., unfair dismissal, wrongful dismissal, entitlement to statutory redundancy payments, discrimination claims- the list is usually extensive to cover all possible employment claims)
  • The employee must receive legal advice from a relevant independent advisor, usually a solicitor on the terms and effect of the agreement.
  • The advisor must be insured and named in the agreement and they are required to also sign a certificate to confirm that they have advised the employee
  • The agreement must state that the above conditions are satisfied.

Failure to satisfy these conditions will render the agreement void.

There are other standard clauses such as confidentiality provisions, arrangements for returning any company property (including data) and they can also provide for a standard reference for future use.

Usually the settlement agreement will provide for payment of any compensation sum along with any notice pay, holiday pay and/or sick leave owed. Whilst it is not a requirement, the employer usually also offers a fixed contribution towards the legal costs of seeking independent advice also.

Generally, the termination/compensation payment is not taxable up to £30,000, but over and above that is subject to tax. Also notice pay, holiday pay or sick pay is subject to tax and national insurance deductions in the usual way.

Why do I have to get independent legal advice?

It is a requirement that you have independent legal advice in order to validate the settlement agreement. This is to ensure that you have had appropriate advice on the settlement so that it cannot be argued for example that you signed the agreement without understanding it or without understanding what potential rights and claims you were giving up.

The legal advisor has to sign a certificate to confirm that they have advised you and this is included in the settlement agreement. Although it is not a legal requirement, the employer usually offers to pay a contribution to the cost of this legal advice.

Contact us for further advice…….