What is a settlement agreement?

  • Posted

Settlement agreements are commonly used to settle a workplace dispute on agreed terms. It is often where there is a redundancy situation or when the employee and employer feel it’s best to end the employment for another reason.

If you have been offered a settlement agreement by your employer, you may feel confused about what to do next. In this blog, our employment solicitors explain what a settlement agreement is and how it works.

How do settlement agreements work?

Settlement agreements (formerly known as ‘compromise agreements’) set out the terms the employer will offer to the employee if they leave their employment.

Settlement agreements have different purposes for different parties. For employees, they provide details of the payments and benefits which they will receive on leaving their job. They give the employee a contractual right to receive them.

For employers, it records the fact that the employee will not take any legal action against them in future (save for a few exceptions). It therefore provides the employer with peace of mind that they will not be subject to an employment claim.

What does a settlement agreement include?

Settlement agreements tend to follow a set structure as they are legal contracts, however, what is included depends on the circumstances and it is important to speak to an employment law solicitor before putting anything in writing.

A typical settlement agreement includes:

  • A financial settlement offer. This should account for the employee’s length of service, the time it may take them to find suitable alternative employment, how long it may take to backfill the role, the reasons for the settlement agreement and the possible liabilities involved if settlement is not reached.
  • An explanation as to how any tax will be treated, including confirmation that the first £30,000 of any compensation payment can be paid free of tax.
  • A contribution towards your legal costs so you do not have to pay the full amount.
  • Confidentiality clauses that stop you from discussing the existence and/or terms of your agreement with anybody other than specific people like your immediate family and your solicitor.
  • A reference. This can either be a short statement confirming the date/details of employment or a detailed reference.

A settlement agreement sometimes includes a confidentiality clause (also known as a ‘non-disclosure agreement’ or a ‘gagging clause’). This sets out what you can and can’t do after you have left your employment, for example, not disclosing certain information, including the contents, or even existence, of the settlement agreement.

Who requests a settlement agreement?

It is normally the employer who will offer the employee a settlement agreement. It is good practice for the employer to discuss the settlement with the employee and then make an offer verbally or in writing. The final agreement must be in writing.

Often, employers offer these if an employee has expressed dissatisfaction and is looking for a way out; settlement agreements offer the employee the chance to leave their job with financial compensation, but without making a claim or taking them to an employment tribunal (and with the caveat that they will not claim in the future).

Having said that, employees can request a settlement agreement. This normally happens in situations where an employee does not get along with a colleague and there appears to be no other resolution. In this situation, the employee might offer their employer an agreement whereby they receive payment on the basis that they will leave on a set date, allowing the employer to recruit a replacement.

Do I need a solicitor for a settlement agreement?

As settlement agreements are a type of employment contract, they must be set out in a certain format which follows set legislation and can only be entered into if the employee has been advised by an employment lawyer.

A qualified legal adviser can review the agreement and advise the employee on whether it is reasonable and fair, in line with their legal rights. They can also help negotiate better terms, if appropriate.

Both employers and employees should seek legal advice before agreeing on a settlement agreement. ACAS guidance sets out that employees should have a minimum of 10 calendar days to consider a formal written settlement agreement and to receive independent advice.

Is a settlement agreement a good idea?

The main benefit of a settlement agreement is that the employer and employee can end their employment relationship on agreed and, more amicable, terms. However, there are pros and cons to settlement agreements.

Pros of a settlement agreement:

  • They provide a quick and ‘clean’ end to employment without the need for redundancy, performance plans, or an employment tribunal,
  • They can provide compensation, allowing the employee the time to find employment elsewhere.
  • They give the parties certainty and control of the terms of the agreement so specific terms can be agreed that are relevant to the parties’ individual situation.
  • They often include a reference so that the employee can find another job.
  • The nature and details of the dispute can remain confidential so there is no damage to reputation.
  • They are more cost-effective than going through a claims process or employment tribunal.

Cons of a settlement offer:

  • Due to the quick turnaround and offering ‘on a plate’, the employee can feel pressured to take the settlement without properly considering whether a Tribunal or court claim should be made.
  • Settlement agreements can be used inappropriately as a way of ‘covering up’ bad management or valid claims, thus putting the wider workforce at risk.
  • Sometimes people do not get the answers they want, e.g. from a grievance process, and by accepting a settlement agreement and often no further action is taken.
  • If a settlement is not agreed, the employment relationship can be put at risk, with both parties having to consider a Tribunal.

Are settlement agreements legally binding?

A settlement agreement is a legally binding contract once the employee has received legal advice, both parties have had sufficient time to review the settlement and it is signed by the employee and employer.

Settlement agreements are used to extinguish most possible claims the employee or the employer may have against the other. By signing it, you agree not to make a claim in the future (except in very exceptional circumstances).

Is a settlement agreement the same as redundancy?

No. A settlement agreement is not the same as redundancy. Settlement agreements can be made at any time and are often used to settle a dispute or to eliminate the risk of a future dispute. With settlement agreements, the employee waives their right to go through the redundancy process in return for a payment (which may be negotiable) and a clean break.

How much does a settlement agreement cost?

Employers usually contribute towards the cost of having a settlement agreement reviewed by a solicitor.

The cost of making or reviewing a settlement agreement varies, however, settlement agreements are included in our fixed-fee packages. Click here to view up-to-date prices.

Contact our settlement agreement solicitors in Bristol

If you have been informed that you might be offered a settlement agreement, or you have been offered one, our employment solicitors would be happy to discuss your options.

To book an appointment, call us on 0117 325 2929 or fill out our online enquiry form.


    How can we help you?

    We’re here to help. Please fill in the form and we’ll get back to you as soon as we can. Or call us on 0117 325 2929.