Settlement Agreements

Settlement Agreements were once called Compromise Agreements and are legally binding between a employee and an employer. It is customary for the employer to supply the employee with a severance payment with the employee, in return, agreeing that they will not pursue a claim in the Courts or at a Tribunal. Settlement Agreements are also able to be used to conclude workplace issues that do not end the working relationship between the two parties, such as resolving disputes over issues like holiday pay.

What Are The Benefits Of Settlement Agreements?

The primary benefit of Settlement Agreements is that confidentiality is maintained about the circumstances which led to the termination of the employee’s contract. Also included within the document are protections which may vary between agreements, but which usually include preventing employees from making any disparaging remarks about their former employer.

After signing a Settlement Agreement, employers also have the reassurance of knowing that former employees will be unable to bring a claim against them in Court or at a Tribunal unless the reason for their termination has been misrepresented.

Is There A Difference Between Compromise Agreements And Settlement Agreements?

Before the end of July 2013, the term Compromise Agreement was used instead of Settlement Agreement however there are very few differences between the two except that in the form of a Settlement Agreement, the terms preclude discussion about the Agreement being used in any ordinary claim for unfair dismissal except when the employer has behaved improperly.

Must Employees Accept A Settlement Agreement?

Employees are entitled to refuse a Settlement Agreement if they would prefer not to end their contract in this way, or if they feel the amount offered to them by way of severance pay is too low. In general, if an employee decides that a Settlement Agreement is the optimal outcome to the situation, it is safe for the employer to proceed in this way. However, if the employer does suggest that the employee’s contract is terminated in this way they must also offer the employee several options such as going through redundancy procedures or putting them on performance reviews.

Employers should avoid any situation where employees may argue they had no alternative but to agree to a Settlement Agreement as even an off-the-record conversation or without prejudice letter could later be used as evidence of discrimination or unfair dismissal.

If a disciplinary hearing, redundancy procedure or performance review remains to be completed, employers must let the employee know the process shall continue or commence while the negotiations are underway as to the terms of a Settlement Agreement and that they will cease only once an agreement is agreed and signed by the employee and employer.

Why Should A Settlement Agreement Be Used?

Settlement Agreements are usually offered where severance terms have been mutually agreed with an employee. They also prevent the necessity of a long and complex process like capability reviews or redundancy processes before ending the contract. If there are any ongoing issues like alleged discrimination or grievances, the confidence and trust between employer and employee are often broken down permanently and therefore a Settlement Agreement is often the best option.

How Much Is Usually Paid In A Settlement Agreement?

  • Compensation for the employee’s loss of office – compensation can be paid up to £30,000 without deduction of tax
  • Notice payment –
  • Bonuses and commissions owed to the employee
  • Pension contributions still owed to the employee
  • Life and medical insurance – in cases where employees are in a company scheme they may either have these benefits terminated on their final day of employment or be allowed to stay in the scheme until the end of the period which has been paid for.
    Making A Fair Offer

A solicitor can advise the appropriate sum to offer an employee depending on the circumstances surrounding the case taking into account whether the employee would be able to bring a strong claim against the employer at Tribunal. There may be some negotiations between the employer and employee’s solicitors to determine a final amount which suits both parties. Employers are not required to provide references for the employee (save in the finance sector) however any reference supplied must be accurate, fair and true.