What is a Settlement Agreement?
A settlement agreement is a legally binding contract between an employer and employee to resolve a dispute or terminate the employment relationship.
Entering into a settlement agreement is a way of avoiding costly and lengthy litigation procedures by offering an employee an enhanced financial package in exchange for agreeing not to bring any claim against their employer. Employment Tribunal proceedings can be expensive, lengthy and incredibly stressful, and a settlement agreement is a way of reaching an agreement quickly and on mutually agreed terms.
When is a Settlement Agreement Used?
A settlement agreement is usually offered by an employer at the end of the employment relationship or to resolve a dispute. An employee can request a settlement agreement but in these circumstances an employer is not obliged to offer one. Settlement agreements are voluntary and parties do not have to agree to enter into them. There is often a period of negotiation before terms are agreed between the parties. They are typically used in the following circumstances:
- Redundancy situation
- Performance management
- Long-term sickness absence
- To settle a grievance
Settlement Payments and Terms
There is no set scale of payment and the amount of any settlement or compensatory payment will depend on the individual circumstances of each case, such as how long the employee has been employed, the circumstances leading to the agreement being offered and the potential liability and cost of taking the matter to an Employment Tribunal. Payments may also include a payment in lieu of notice and a payment for accrued but untaken holiday.
Settlement agreements also typically include an agreed reference, a tax indemnity clause, a confidentiality clause, and a clause preventing the employee from making any derogatory comments about their employer.
Legal Requirements
For the settlement agreement to be valid and legally binding, it must meet a number of statutory requirements, as follows:
- It must be in writing
- It must relate to a particular complaint or proceedings
- It must be signed by both the employee and the employer
- The employee must have received independent legal advice
- The legal adviser must be identified and insured and must sign a certificate
- It must state that the applicable statutory regulatory conditions have been met
Employees should be given a reasonable amount of time to consider the proposed conditions of the agreement. The recommended period is 10 calendar days unless the parties agree otherwise. If an employer puts undue pressure on an employee to sign a settlement agreement, this may be seen as improper behaviour, which may invalidate the terms of the agreement.
An employee must seek legal advice before signing the agreement. The legal adviser has a duty to advise the employee of their legal rights, the terms and effect of the settlement agreement and any potential claims they could bring if they were not to sign the settlement agreement. An employer will usually make a contribution to the reasonable costs incurred by the employee in obtaining legal advice, although they are not obliged to do so.
For further advice on settlement agreements and how we can help you, please contact our Employment Team on 0345 646 0406 or fill in our online enquiry form and a member of our Team will be in touch.