A Settlement Agreement (formerly known as a Compromise Agreement) is a contract entered into between an employer and its employee upon termination of the employee’s employment, which documents the agreement reached between the parties.

What is the purpose of a Settlement Agreement?

It is not uncommon for employment relationships to see difficult times, however sometimes it is clear that there has been a breakdown in the relationship between the employer and employee which is beyond repair.

A settlement agreement is an opportunity for the parties to mutually agree the end of an employee’s employment with the employer. The purpose of a settlement agreement is to set out clearly that the employee agrees to give up his/her rights to pursue any claim in the Employment Tribunal in relation to their employment and its termination in return for, usually, a payment made by the employer.

Settlement agreements are also commonly used in circumstances where a business undertakes a reorganisation which leads to a number of employees being made redundant. It is in the commercial interests of the business to seek to limit any claims from outgoing employees and a settlement agreement is perfect way  to minimise the risk of any future claims.

It is important however to note that there are a number of claims which cannot be waived in a settlement agreement, such as claims in relation to employee accrued pension rights.

What are the requirements of a Settlement Agreement?

There a number of legal requirements which need to be met for a settlement agreement to be considered a valid and binding agreement. For example, the settlement agreement must be in writing and the employee must obtain independent legal advice from a qualified lawyer as to the terms and effect of the agreement and in particular, the effect on their ability to pursue a claim in an employment tribunal.

There are also certain rules in relation to payments made to employees as part of the settlement which concern tax. It is important to ensure this is dealt with correctly to avoid the risk of receiving a demand (and possibly a penalty) from HMRC.

It is therefore important, whether you are an employer or an employee, to obtain advice from an experienced lawyer.

From an employer’s perspective, it is in the interests of the business that it is safeguarded against any potential claims arising from an employee’s departure. Settlement agreements can be as bespoke as you like to cover any eventuality. Likewise for an employee, it is important that any claims that they may have, have been adequately addressed in the agreement in terms of the settlement figure and ensuring that is of fair value in relation to any possible claim.

If you have been given a settlement agreement and would like to review it with a solicitor, or you would like help drafting a settlement agreement, Parrott & Coales can help. Contact us today on 01296 318 500 or email law@pandcllp.co.uk today.

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