Settlement Agreements

A Settlement Agreement is drawn up by an employer to set out the terms and conditions offered to an employee to terminate the employment relationship on terms which they seek to agree with the employee.  In return for terms offered by the employer, the employee will be settling any claims they may have against the employer and usually any of their directors, employees and group companies, in relation to the employee’s employment and the manner of its termination.  The employee is required to take independent legal advice and once the terms are agreed by the employer and employee and the independent adviser completed their certificate or letter, the employment relationship will end on the agreed terms. Once the Settlement Agreement is signed by the employee, employer and Legal Adviser, it becomes legally binding and is enforceable in the Court and Employment Tribunal.

Settlement Agreements can be used to terminate employment or on the withdrawal of Employment Tribunal proceedings. We also assist with the drafting of COT3 agreements.

A Settlement Agreement should be negotiated by employer and employee so that its terms protect both parties’ interests. As the employee must take independent legal advice on the proposed Settlement Agreement terms, employers will usually pay a fee or legal costs contribution to the employee’s legal adviser to facilitate this.

Key Parts of a Settlement Agreement

Key aspects of the Settlement Agreement include:

  • Details of the employer and employee.
  • The termination date.
  • The consideration for the termination of employment, the amount, the taxable status and the timescale for payments.
  • All contractual payments due, for example, arrears of salary, bonus/commission, notice pay and holiday pay.
  • Any expenses due.
  • Details of the employment claim the employee will be settling or compromising the right to pursue once the Settlement Agreement is signed and in force.
  • Usually the withdrawal of any appeals, grievances and data subject to access requests.
  • Return of company property.
  • Confidentiality provisions.
  • Tax status and tax indemnities.
  • Warranties and Indemnities given by the employee and employer.
  • Consequences of non-observance of the terms of the agreement.
  • Terms of a reference and announcement of the employee’s departure (if applicable).
  • The employer’s fee contribution for the employee seeking independent advice.

Benefits of a Settlement Agreement

If both parties agree on the terms of the settlement, the Settlement Agreement achieves finality and an end to the threat of Employment Tribunal proceedings or the withdrawal of a claim.  It allows employee and employer to part on amicable terms.

The Settlement Agreement significantly reduces the claims the employee can make against the employer and therefore reduces the risk of the costs involved in Tribunal proceedings.

A key benefit of a settlement agreement is that usually the first £30,000 of any termination payment under a settlement agreement can be paid free of PAYE tax to the employee. Employment Solicitors and Barristers can give robust and honest advice on the benefits of a Settlement Agreement for an employer or employee so you can make an informed decision on whether the Settlement Agreement benefits you.

Our range of services includes:

  • Drafting and advising on the terms of Settlement Agreements.
  • Advising on tailored commercial settlement terms and figures.
  • Drafting and negotiating bespoke amendments tailored to specific client needs and requests.
  • Identifying and valuing potential claims arising out of the circumstances leading up to the termination of employment and assisting to reduce exposure.

For more information on Settlement Agreements or to discuss a proposed Settlement Agreement with one or more of your employees, please contact us.