What is a settlement agreement and when might you use one?

What is a settlement agreement and when might you use one?

What is a settlement agreement?

A settlement agreement is a legally enforceable contract between an employer and an employee that resolves claims on the part of the employee. A settlement agreement is most often used when a job ends; it does not, however, have to be. A settlement agreement can also be utilized when both parties wish to settle a dispute that has arisen during their working relationship.

When might a settlement agreement be used?

A settlement agreement might be useful in a variety of circumstances, including when an employee is not performing well and neither party want to go through a lengthy capability procedure, and both the employer and the employee are willing to conclude their relationship on agreed-upon terms.

How are terms decided within a settlement agreement?

The terms of the settlement agreement will be determined by mutual consent between the employer and employee. The written settlement agreement document will then define the claims for which the employee agrees not to pursue in exchange for a set payment.

A settlement agreement needs to be customized for the employee and their specific circumstances. They must provide a clear waiver of the employee’s claims, which they may or might not have.

The settlement payments

The agreement should detail the payments that have been agreed upon, as well as whether any are to be paid to the employee without tax.

Payments of up to £30,000 in compensation may often be paid without tax being deducted if the payment is made on an “ex gratia basis” (that is, it’s a payment you’ve chosen to make rather than one you’re required by law to give) or as damages for a breach of contract. This can be a grey area, though, and it’s always advisable to seek professional assistance before making a tax-free payment.

How much should be paid in a settlement agreement?

There is no fixed scale of payments, and the amount of any settlement payment will be determined on a case-by-case basis. The following are some factors to consider:

  • When it comes to this sort of stuff, there is no need to make a judgment. nAs long as you have an idea of how long the employee has worked for you
  • the circumstances behind your decision to offer a settlement agreement
  • How long would it take to resolve a disagreement if the agreement was not reached?
  • The cost of defending a claim in an Employment Tribunal, as well as any potential liability.

What non-financial terms can be included in a settlement agreement?

It’s quite common for a reference to be part of the settlement agreement, with an exception made on the employer’s behalf stating that when giving a reference for the employee, he or she will not deviate from the text approved as part of the bargain.

Another common provision in settlement agreements is a confidentiality clause, which states that the employee will keep the terms of the agreement, the amount of money involved, and the reasons for reaching an agreement confidential. It’s also typical for there to be a clause prohibiting the employee from making any negative remarks about his or her employer.

The agreement will generally specify what items are expressly excluded from the settlement, such as ensuring that the employee does not give up any pension rights they have accrued and is free to pursue a personal injury claim in respect of any injury incurred during their employment but which they are currently unaware of.

How do I make sure a settlement agreement is legally binding?

Another crucial aspect to consider is that, for the settlement agreement to be valid and enforceable, it must satisfy several statutory criteria, including that it must be written and specify the present complaints.

For the employee to be eligible, he or she must have been advised on the provisions and implications of the agreement by an independent solicitor (or another adviser specified in the Employment Rights Act 1996, such as a properly certified trade union official). The recipient’s advice must be covered by insurance.

If a settlement agreement does not fulfil all the statutory criteria, it will be invalid and open to the employee continuing to bring claims against the employer. As a result, while drafting the agreement, it is critical to exercise extreme caution.

It’s also critical that any discussions between the parties regarding the proposed agreement follow appropriate legal standards, since whatever talks take place may be used as evidence in any legal case that follows if the deal doesn’t go through.

Settlement agreements are a fantastic approach to ensure that employer/employee conflicts (or possible conflicts) are resolved without the need for either party to resort to legal action. The law relating to them, on the other hand, may be intricate, and it’s always a good idea to get expert assistance before beginning down the settlement agreement road.


Please enter your comment!
Please enter your name here