What is a Settlement Agreement?

A settlement agreement (formerly known as a compromise agreement) is a written legal agreement between an employer and an employee, whereby an employee agrees to waive certain employment rights, usually in return for an additional tax free payment. Such payments can be paid by the employer tax-free up to the threshold of £30,000. Settlement agreements are often used in redundancy situations or to bring an employee’s employment to an end quickly as part of a negotiated exit and to promote a clean break. They can also be entered into where there has been a dispute at work that has for example become the subject of a grievance and where the employment relationship has broken down.

In order for a settlement agreement to be legally binding in law and to prevent an employee from pursuing their employment rights against their employer, the following conditions must be present:

  • It must be in writing.
  • The settlement agreement must confirm the specific legal complaints that are in the employee’s contemplation – for example and typically unfair dismissal.
  • The employee must receive independent legal advice from a qualified lawyer or legal advisor who needs to advise on the terms and effect of signing the agreement, and whose firm has a relevant policy of indemnity insurance and whose details are also set out in the agreement. Usually there is an advisor’s certificate for the qualified lawyer to sign confirming that they have provided the requisite independent legal advice to the employee.
  • The agreement must also set out what statutory legislative provisions are covered.
  • The statement must state that the applicable statutory conditions regulating settlement agreements have been satisfied.
  • The parties must also sign the agreement in order for it to become legally binding.

As well as dealing with waiving various employment rights it is also usual for settlement agreements to include other obligations for example:

  • Terms of payment including the payment of the termination payment, any payment in lieu of notice, final salary, accrued pay in lieu of holidays and contractual benefits and a time-frame for the employer making such payments.
  • A confidentiality agreement preventing the disclosure of the settlement agreement to third parties, and to protect the employer’s trade secrets.
  • A clause dealing with the employer’s contribution to the employee’s legal fees that are associated with the independent legal advice and upon production of an invoice.
  • A non-bad mouthing clause preventing the employer and employee from making disparaging comments about each other especially on social media.
  • An agreed form of reference, although many employers will only provide a basic factual reference.
  • Adherance to any post termination restrictive covenants contained in an earlier contract of employment preventing the employee from poaching clients and staff and from working for competitor employers. These should only be as reasonable as is necessary to protect the employer’s legitimate business interests.
  • Clawback provisions in the event the employee breaches the terms of the agreement.
  • A tax indemnity to the benefit of the employer in the event that HMRC determines that any termination payment must be taxed (which is not very common)
  • The return of any company property by the employee to the employer usually before the agreed termination date.

It is also important to mention that future personal injury claims and pension disputes are excluded from settlement agreements and can still be pursued at a later date assuming that such claims fall within the statutory limitation period.

If you would like more information speak to our Employment Solicitor, Steven Eckett, on 020 7998 7777 or email him at steven.eckett@bloomsbury-law.com.

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