Time to settle for it? A guide to settlement agreements for employers & employees

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Is a settlement agreement the same as a compromise agreement? Are settlement agreements legally binding? And are they only used in redundancy situations? Our Employment solicitor Clare Thomas explains all in this guide to settlement agreements.

What is a settlement agreement?

Previously known as a compromise agreement, a settlement agreement is recognised by statute as a legally binding contract between an employer and employee, which waives an employee’s right to bring most claims in the employment tribunal and other courts against the employer.  In return, the employee usually receives a financial settlement.

When are settlement agreements used?

A settlement agreement can be used either during employment or on termination. A settlement agreement can be used in various employment situations; for example, when an enhanced redundancy payment is made or in situations involving an employee’s poor performance or where there has been a breakdown in trust and confidence between the employee and employer.

Either party can request a settlement agreement, but any such discussions must be done either on a without prejudice basis or as part of a “protected conversation”.  Legal advice should be obtained before offering or requesting a settlement agreement to ensure it is being done in the right way and at the right time.  Failure to do so could increase the risk of a claim against the employer or undermine the value of any claim the employee might have.

What are the benefits of a settlement agreement for an employer?

The main benefits for an employer in using a settlement agreement is that once both parties have signed and agreed the terms they are then safeguarded against an employee pursuing a claim against them in a tribunal or other court regarding their employment or its termination.

A settlement agreement can also include confidentiality clauses to protect the employer’s confidential information and to prevent the employee publicising the existence and terms of the agreement or making comments or taking action which might damage the employer’s reputation.

The settlement agreement can also be used to introduce or affirm existing post-termination restrictions, which may, for example, prevent the employee working for a competitor or contacting key clients or suppliers for a set period

A settlement agreement can also cover the return of company property, payment of any outstanding holiday and resolve any notice pay issues.

What are the benefits of a settlement agreement for an employee?

For a settlement agreement to be legally binding an employee must take independent legal advice on the document and most employers will pay a contribution towards these legal fees. This allows the employee to make an informed choice as to whether it is right for them to waive their rights by signing a settlement agreement or whether it would be better for them to re-negotiate the terms or seek recourse in the employment tribunal or court.

A settlement agreement ensures the employee has clarity on what payments are due and when and can also include an agreed reference, giving the employee peace of mind.

Can a settlement agreement be withdrawn by an employer or refused by an employee?

Up until the point the agreement is signed by both parties then the agreement can be withdrawn. Some employers have standard terms for settlement agreements and therefore there is limited room for negotiation on the terms. However, it is also common for the wording to be amended to suit both parties; the level of negotiation depends on the relative bargaining power of the parties.

If an agreement is withdrawn or an employee chooses not to sign it, then usually the employer/employee will need to complete any internal procedures that need to be followed and then the employee will need to seek recourse in the employment tribunal or other court if the circumstances warrant it.

How much does a settlement agreement cost?

A settlement agreement must be drafted in a very specific way for it to be legally binding.  Bowcock & Pursaill can assist with drafting the document to ensure it is legally binding and therefore a valid waiver of claims.  It is usual for the employer to draft the settlement agreement. The initial cost to take instructions from the client and draft the agreement can vary but usually starts from £500 (plus VAT).  Additional fees will depend on the level of tailoring and negotiation required to finalise the agreement.

Is the amount paid via a settlement agreement taxable?

Since April 2018, all payments in lieu of notice are now subject to tax and National Insurance Contributions (NICs). Redundancy or compensation payments can be paid tax free up to a limit of £30,000, however other pay such as holiday pay or bonus or commission payments are taxable. Bowcock & Pursaill can help advise on the taxation treatment of payments made under a settlement agreement.

Clare Thomas can help both employers and employees with settlement agreements, from drafting agreements for businesses to reviewing the terms of them for employees. Drafting agreements is a service which is also covered under the fixed fee Bowcock & Pursaill Employer Protection Scheme.

Interested in finding out more? Contact Tim Wolley or Clare Thomas by calling 01782 200000 or email ct@bowcockpursaill.co.uk or tw@bowcockpursaill.co.uk