What is a settlement agreement?
In employment law, a settlement agreement (previously known as a compromise agreement) is a document which brings the employment relationship to an end on mutually agreed terms.
Once the settlement agreement has been signed by both parties, the document will be legally binding.
When should settlement agreements be used?
Settlement agreements are most often used in situations where an employer and employee feel that the employment relationship is no longer working and therefore a settlement agreement provides for a clean break. This is often the most amicable way of bringing the employment contract to a close.
What to include in a settlement agreement?
A settlement agreement should include the following:
- The agreement needs to specify the exact date on which the employment is due to terminate. This is called the ‘termination date’.
- A severance payment which can be paid tax free up to £30,000.
- If the employee is not required to work their notice and is instead being paid in lieu, this should be confirmed in the settlement agreement, along with confirmation that this will be taxed, as is required by HMRC.
- Pay in lieu of any accrued but untaken annual leave on a pro-rata basis up to the termination date. This also needs to be taxed.
- There are a number of legal warranties that are included within settlement agreements as standard, including that the employee has not acted in repudiatory breach of contract, they have not issued any claims against the company and that they will keep the existence and the terms of the agreement itself confidential.
- The employee must receive independent legal advice before signing the settlement agreement. An adviser’s certificate will be included as a schedule to the agreement, which the solicitor or legal adviser signs to say they have given the advice.
Does an employee have to sign a settlement agreement?
In order for the settlement agreement to be legally binding, it has to be signed by both the employee and the employer.
If the employee refuses to sign the settlement agreement, the company will need to consider alternative options and would be best advised to seek legal advice at that point.
What are the benefits of using a settlement agreement?
Using a settlement agreement is often a quicker and more efficient way of terminating the employment contract. For example, if it is being used as an alternative to redundancy, it will save the employer having to follow a formal redundancy process and is therefore often viewed as an attractive alternative.
For the employer, the main benefit of a settlement agreement is that it stops the employee being able to bring claims against them in connection with their employment. In return, the benefit to the employee is that they will receive compensation for this, which can be paid tax free up to £30,000.
Why choose SAS Daniels
We can advise what options are available to you and the associated risks and benefits of each.
Our experienced employment lawyers can ensure your settlement agreement is legally binding and protects your interests. We will provide you with practical and robust employment law and HR support you can trust.
What is a settlement agreement?
In employment law, a settlement agreement (previously known as a compromise agreement) is a document which brings the employment relationship to an end on mutually agreed terms.
Once the settlement agreement has been signed by both parties, the document will be legally binding.
When should settlement agreements be used?
Settlement agreements are most often used in situations where an employer and employee feel that the employment relationship is no longer working and therefore a settlement agreement provides for a clean break. This is often the most amicable way of bringing the employment contract to a close.
What to include in a settlement agreement?
A settlement agreement should include the following:
- The agreement needs to specify the exact date on which the employment is due to terminate. This is called the ‘termination date’.
- A severance payment which can be paid tax free up to £30,000.
- If the employee is not required to work their notice and is instead being paid in lieu, this should be confirmed in the settlement agreement, along with confirmation that this will be taxed, as is required by HMRC.
- Pay in lieu of any accrued but untaken annual leave on a pro-rata basis up to the termination date. This also needs to be taxed.
- There are a number of legal warranties that are included within settlement agreements as standard, including that the employee has not acted in repudiatory breach of contract, they have not issued any claims against the company and that they will keep the existence and the terms of the agreement itself confidential.
- The employee must receive independent legal advice before signing the settlement agreement. An adviser’s certificate will be included as a schedule to the agreement, which the solicitor or legal adviser signs to say they have given the advice.
Does an employee have to sign a settlement agreement?
In order for the settlement agreement to be legally binding, it has to be signed by both the employee and the employer.
If the employee refuses to sign the settlement agreement, the company will need to consider alternative options and would be best advised to seek legal advice at that point.
What are the benefits of using a settlement agreement?
Using a settlement agreement is often a quicker and more efficient way of terminating the employment contract. For example, if it is being used as an alternative to redundancy, it will save the employer having to follow a formal redundancy process and is therefore often viewed as an attractive alternative.
For the employer, the main benefit of a settlement agreement is that it stops the employee being able to bring claims against them in connection with their employment. In return, the benefit to the employee is that they will receive compensation for this, which can be paid tax free up to £30,000.
Why choose SAS Daniels
We can advise what options are available to you and the associated risks and benefits of each.
Our experienced employment lawyers can ensure your settlement agreement is legally binding and protects your interests. We will provide you with practical and robust employment law and HR support you can trust.
