What is a settlement agreement?

Formerly known as a "compromise agreement", a settlement agreement is a legally binding contract between an employer and an employee, which settles claims that the individual may have made against their employer. It waives an individual's rights to make a claim (covered by the agreement) to an employment tribunal or court.

When might a settlement agreement be used?

This type of agreement is usually used in connection with the employment ending. Suppose an employee is not performing well, and neither party wishes to proceed with a capability process, which can be incredibly long and stressful. In that case, both the employer and employee may be willing to bring the employment to an end quickly, on agreed financial terms. A settlement agreement can also be used in situations where employment is ongoing, but both parties want to settle a dispute that has arisen, such as wage disputes, discrimination or harassment.

How are the terms agreed?

Terms must be mutually agreed between the employer and the employee, and they will need to be set out clearly in the written settlement agreement, recording the claims that the employee agrees not to pursue in exchange for the agreed payment.

One common request is that the agreement includes a confidentiality clause, otherwise known as a 'gagging clause'. This is added to prevent the employee from disclosing information about the business, as well as preventing them from sharing the fact they have entered into a settlement agreement, and any details surrounding their exit.

Payments should be broken down clearly, with details of whether any sums will be paid to the employee free of tax. The first £30,000 of payment in respect of the termination can be free of tax and National Insurance; however, if the employee received contractual payments, such as bonus payments, these will be taxable.

Understanding the complexities

There is no set scale of payments or terms. Every settlement agreement is unique and voluntary; therefore, both the employer and employee enter a process of negotiation which can be incredibly complicated. Employment Tribunal proceedings can indeed be costly, time-consuming and taxing; however, settlement agreements are not always fast and straightforward; it depends on the nature of the dispute.

In most cases, settlement agreements prove to be very useful in resolving disputes, whilst ensuring neither side has to resort to legal action. You should always seek professional advice before you begin to go along the settlement agreement route. Paul Angel is our specialist solicitor for settlement agreements. He acts for SMEs and individuals in all types of commercial and financial disputes, bringing a willingness to fight his client's corner to achieve the best possible results. If you'd like to get in touch with Paul or wish to learn more about his expertise, please click here.

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