Settlement Agreement

Settlement Agreement Overview

A settlement agreement (previously referred to as compromise agreements) is a way for an employer and an employee to enter into a legally binding contract to bring an employee’s employment to an end. Typically, a settlement agreement will set out a sum of money (often referred to as a severance payment or an ex-gratia payment) to be paid by an employer, in exchange for an employee’s commitment not to bring any employment related claims in an Employment Tribunal.

A settlement agreement can be used to resolve a dispute or a grievance, to provide an alternative during the course of disciplinary or capability proceedings or to simply ask an employee to leave, even if they have done nothing wrong. They are also used to cover enhanced redundancy payments.

There are legal requirements relating to a settlement agreement including:

• It is in writing.
• The employee must take independent legal advice on the terms of the agreement offered.

Key points on settlement agreements

We have set out below some key factors relating to a settlement agreement.

1. Does an employee have to sign a settlement agreement?

This will depend on a number of factors, including the compensation that is offered, the situation
that the employee is facing at work (is it a redundancy, disciplinary or a breakdown in relationships
at work) and what the proposed terms look like. Normally, a settlement agreement is offered to ensure that no tribunal claims are going to be brought against the employer. It is therefore important to weigh up the pros and cons of entering into a settlement agreement. This is where taking independent advice from Aeris Employment Law Ltd will be crucial.

2. Who pays the costs of a settlement agreement?

An employer is not obliged to contribute towards an employee’s costs for obtaining legal advice, but it is very standard for a fee contribution to be offered. This can be anywhere in the range of £350 – £750 plus VAT. The contribution that is offered will normally cover the advice Karin Henson can provide on the terms and effect of the settlement agreement offered. If additional work is required to negotiate a settlement, it will be up to the employer whether they cover these additional costs.

3. How quickly can a settlement agreement be agreed?

An employee should be given a reasonable amount of time to review the terms offered and to seek advice. The amount of time that is required for this will depend on the individual circumstances. If an offer has been made via a "protected conversation", the usual timescale is 10 days.

4. Is a settlement agreement confidential?

It is very common for a settlement agreement to include a clause restricting what can be disclosed about the negotiations and what has been agreed. There will be limits on the use of confidential information and it is also common to see a clause requiring both sides not to badmouth the other.

5. Does a settlement agreement need to be discussed face-to-face?

No – settlement agreements can be discussed over the phone or via video calls. Settlement agreements also do not need to be witnessed, and they are often signed using an electronic signature as opposed to having to send anything in the post.

6. Can one side change their mind once they have signed the agreement?

Once both sides have signed the agreement, it is a binding agreement that applies to both the employer and the employee. If the employee takes advice on the agreement and then decides not to sign it, they are not allowed to refer to the details of any off the record discussions in any tribunal claim they seek to bring at a later date.

7. What about tax?

If an employee is offered pay in lieu of their contractual notice period, this will have to be taxed, even if the employee does not work their notice period. This also applies to holiday pay, commission or and bonuses. With regards to other sums that are offered as an incentive to sign the settlement agreement, genuine termination payments up to £30,000 can be paid without paying tax. Any figure above £30,000 will be taxable at the employee’s normal tax rate.

8. Does the settlement agreement cover a reference?

Many agreements will include an agreed reference. Most references just have the employee’s name, job title, start and finish dates.