The Purpose of a Settlement Agreement

A Settlement Agreement (sometimes referred to as a Compromise Agreement) is a legally binding agreement between employer and employee to resolve workplace disputes by payment to the employee in full and final settlement of their claim or potential claim. Whilst it is not necessary for employment to also be terminated, it is often the case that the agreement is used to bring the employment relationship to an end in a mutually agreed way.

Validity of Settlement Agreement

In order for a Settlement Agreement to be valid, the employee must take independent legal advice on the terms of the agreement. The employer will often contribute towards the legal costs of this as it is in their interest for the employee to obtain such advice.

Settlement Agreements must also be in writing, relate to one of more specific complainants, identify the independent legal advisor and state that the governing statutory provisions have been satisfied.

The independent legal advisor must provide a signed solicitors certificate confirming that the employee has been advised on the terms and that the firm is covered by a contract of insurance.

Negotiating the Settlement

By entering into a Settlement Agreement the employee will have agreed to waive their right to any claim or potential claim in respect of the matters listed in the agreement. In consideration for this, the employer will make payment to the employee to compensate for giving up their right to claim.

The sum specified in the agreement can vary considerably and will depend on a number of factors such as; the type of claim, strength of evidence and seniority of employee. A starting point to reaching a figure is to consider an award which might be made by the Employment Tribunal if the employee’s claim was successful.

When negotiating the agreement, discussions should be made on a “without prejudice” basis to protect the party’s position and prevent pre-contractual negotiations from being relied upon in Court or Tribunal should the employees claim progress rather than entering into the agreement.

Other Terms

Whilst the settlement sum is a crucial term of the agreement other terms of the agreement should not be overlooked from both an employee and employer perspective. An important part of the agreement is often negotiating the reference which will be provided by the employer on prospective employment of the employee.

The employer will often re-iterate restrictive covenants that are included in the employee’s contract. This is highly important where the employer has terminated in breach of contract as such terms will be unenforceable under the contract of employment. However, in return for entering such covenants, the employee should be adequately compensated for this.

Tax Treatment of Termination Payments

Payments made to an employee under their normal contractual rights will be subject to tax and national insurance in the usual way. However, the genuine compensatory award for termination and waiver of their rights is tax free up to £30,000. Anything over this amount is subject to tax and national insurance.

How Paul Robinson Solicitors can help

Whether you are an employer or employee, our Employment Department regularly provides advice on Settlement Agreements. We are experienced in drafting such agreements and tailoring the terms to give enhanced protection and incorporate specific needs of employers.

For employees we provide a prompt and effective service to advice you on the terms and implications of entering into a Settlement Agreement, as well as considering the compensatory award in light of your potential claims.

If you are an employee or an employer and require further assistance, please contact Fiona Colwell, Head of Litigation on 01702 338 338 or [email protected].