Settlement agreements can be an effective way to manage the end of an employment contract.
A settlement agreement (previously known as compromise agreement), is a legally binding and confidential agreement between an employer and an employee. The employer offers the employee a financial sum, and in return, the employee agrees to waive their rights to bring a tribunal or court claim against the employer. Additionally, employers can use settlement agreements as a tool to enhance restrictive covenants, which restrict or prevent an employee from competing with their soon to be ex-employer. Settlement Agreements can also act as a good tool to establish communication of the employee’s departure.
Settlement agreements are used by employers in various situations. They are a way of terminating an employee’s employment without having to undergo a potentially long and difficult process and where a quick exit is preferred.
Settlement agreements often reduce the time and stress of going through a difficult situation such as a grievance or disciplinary process for both parties involved. They can also provide effective compensation to the employee and in many cases a reference.
If offered correctly, settlement agreements are often an amicable way of terminating employment on good terms and enable employees to move on quickly.
As mentioned previously, when an employee agrees to a settlement agreement, this waives their rights to bring claims against the employer (with some exceptions, including pension claims and personal injury claims that have not yet arisen etc.). As the employee is giving up their rights to bring about these claims, it is vital that they receive independent legal advice. Our Employment team will be able to advise on any potential claims that an employee could be giving up by accepting their settlement agreement.
The agreement will specify any sums being paid to the employee. Normally this will include pay and other benefits up to the termination date, which will be subject to tax and national insurance in the normal way. In addition, the employee would expect to receive holiday pay (less tax and national insurance) for untaken holidays which have accrued during the period from the start of the holiday year up to the termination date.
Since the employee is waiving their right to bring any claims, the amount of compensation should reflect closely to the value of the claims they are giving up.
For a settlement agreement to be effective, the employee must have received independent legal advice on the effect of the agreement. Essentially, the employee is waiving their rights to bring an employment claim against the employer.
The employee’s adviser must be named in the agreement and have a current contract of insurance or professional indemnity insurance, covering the risk of a claim against them by the employee in respect of the advice. Hence why this will almost always be signed off by an employment lawyer. In most cases, the employer agrees to pay a contribution in relation to obtaining advice on the agreement.
You can access further information on Settlement Agreements by viewing our Settlement Agreements FAQs.
Our employment law team have significant experience advising employers and employees on settlement agreements. This experience allows us to draft effective settlement agreements and provide advice on negotiations.
For more information on how we can help support you create a settlement agreement, please contact one of our employment specialists below.