Settlement agreements (formerly known as compromise agreements) in an employment context are presently widespread and set out binding terms agreed between an employer and employee covering the ending of the employment relationship. Often, they will arise following the conclusion of a redundancy consultation when there is no alternative to letting the employee go, or they will arise following a protected conversation between the employer & employee when both parties agree to bring the employment relationship to an end for whatever reason.
A good settlement agreement will record many specific terms including the date of termination, payments that are going to be made to the employee (such as notice pay, accrued holiday pay, statutory redundancy, compensation payment etc.), post termination restrictions that will still apply, if outplacement support is being provided, provision of a reference and confidentiality provisions that will still apply post termination.
In respect of genuine compensation payments, these generally can be paid to the employee tax free up to a £30,000 limit. There are strict rules in place preventing notice pay for example, which is taxable, being added to the compensation payment to take advantage of the tax-free threshold.
The settlement agreement will also make it clear that it is being accepted by the employee in full and final settlement of all potential claims, including all statutory and contractual claims. This of course is attractive to employers as it prevents former employees subsequently bringing a claim against them after they have left. It effectively provides a clean break between the employee and employer allowing both parties to go their own separate ways. ACAS has produced some very useful guidance on settlement agreements, which can be found on their website.
Entering into a settlement agreement is entirely voluntary and provides employees with an alternative to bringing a claim through an Employment Tribunal, which could take many months to reach a conclusion with an uncertain outcome. It is not however possible for an employee to demand that a settlement agreement is provided as a matter of course. A situation has to exist where the employment relationship is likely to end.
For a settlement agreement to be valid, it has to be in writing, so a handshake in the lift and the exchanging of pleasantries will not suffice. Further, the employee must take independent advice on the terms and effect of the settlement from a solicitor, or other suitably qualified representative. It is also a requirement that the adviser has in place professional indemnity insurance.
Due to the need to take independent legal advice, an employer will in nearly all cases agree to make a contribution towards the legal costs involved. Sometimes the contribution does not cover the full cost involved but nonetheless the employee will agree with the adviser to make up the shortfall.
Once the settlement agreement is concluded and signed off by the parties it becomes a binding contract. If either party breaches the terms of the settlement agreement, then the other can sue upon its terms.
We at Kingsfords are able to advise employees who are in receipt of a settlement agreement, or employers who need one to be drafted. Please contact me or one of my colleagues in the employment law department if you require assistance. For more information, visit our employment law page.