10 Sep 2020
A settlement agreement is a legally binding contract between an employer and employee which is a full and final settlement of any claims that an employee may have against his/her employer. Your employer will use this form of agreement as it is one of two types of agreements that allow you to legally waive any claims you might have at an employment tribunal.
Settlement agreements are typically used to bring an end to your employment either where an employer is making an enhanced redundancy payment, or when the relationship between you and your employer have soured or your employer has concerns about you. Common scenarios include redundancy, where the employer has concerns about the employee’s performance, to avoid disciplinary action, where the employee has been on long term sick and/or or where the relationship between you and your employer has broken down.
Often the agreements are used to avoid the employer needing to go through a formal procedure. Instead a financial payment is agreed in return for you agreeing to waive your rights to go to an employment tribunal.
There is no set amount of payments and the amount of any settlement payment will depend upon the individual circumstances of each case, for example:
The settlement agreement should contain a clear breakdown of the payments which have been agreed and should also state whether any of them are to be paid to you free of tax.
Payments of up to £30,000 compensation can often be paid without tax being deducted, if the payment is being made on an “ex gratia basis” (that is, it’s a payment your employer has decided to make over and above your contractual and statutory entitlements). Sums attributable to your notice period are always taxable.
It is often the case that a reference will be agreed as part of the settlement agreement and most agreements will contain detailed arrangements about confidentiality and not making derogatory remarks about each other.
In order for an agreement to be binding and effective from your employer’s perspective, it must be in writing and must specify the particular complaints which the agreement is now settling. Critically, you must take independent legal advice as to the terms and effect of the agreement. Normally, your employer will contribute to your legal costs but sadly some employers have an unrealistic view on how much time needs to be spent to ensure that you are properly advised!
It is also common for the employer not to put forward its best offer first time around. We have negotiated many substantial improvements in settlement terms over the years but this obviously depends on how generous the initial offer is. Typically, most negotiations are concluded within 1 to 2 weeks.
Daniel Wilde is Head of Employment Law at Harding Evans Solicitors. You can contact him on firstname.lastname@example.org or 01633 760662 or visit www.hardingevans.com.
Harding Evans is a trading name of Harding Evans LLP, a limited liability partnership, registered in England & Wales (registered number: OC311802), authorised and regulated by the Solicitors Regulation Authority (SRA number: 419663).