Settlement agreements and compromise agreements

Settlement agreements can be used as an alternative to many different processes or to settle disputes with current or former employees.

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Settlement agreement advice for employers
Settlement agreements can be a useful tool to save time, costs and stress for any employer. However, they are not without their pitfalls. We can advise you from an early stage to help protect your organisation.

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:

  1. The agreement needs to specify the exact date on which the employment is due to terminate. This is called the ‘termination date’.
  2. A severance payment which can be paid tax free up to £30,000.
  3. 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.
  4. 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.
  5. 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.
  6. 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:

  1. The agreement needs to specify the exact date on which the employment is due to terminate. This is called the ‘termination date’.
  2. A severance payment which can be paid tax free up to £30,000.
  3. 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.
  4. 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.
  5. 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.
  6. 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.

Speak to a member of our employment team on 0161 475 7668 or get in touch via our contact form

Speak to a member of our employment team on 0161 475 7668 or get in touch via our contact form

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Why work with us

Why choose SAS Daniels for employment law support?

Practical and commercial advice from our knowledgeable and approachable team. We deal with all areas of employment law and can help with any query. You can also benefit from our fixed-price SAS Protect service which gives you HR and employment law support whenever you need it.

Settlement agreement FAQs

Frequently asked questions on settlement agreements
  • As a business, what legal advice do I need to offer to employees on settlement agreements?

    An employee needs to take independent legal advice before signing a settlement agreement and the employer should provide a contribution towards those fees. The employer is not obliged to cover the fees in full, just to contribute.
  • Can the employee’s employment rights be waived in the settlement agreement?

    By signing a settlement agreement, an employee agrees to certain terms, such as waiving their right to bring claims against the employer. However, not all claims can be settled under a settlement agreement. Claims in respect of accrued pension rights and personal injury claims that have not yet arisen, or that the employee could not reasonably be aware of, cannot be settled. Claims in respect of certain statutory rights also cannot be settled, in particular claims for failure to inform and consult with appropriate representatives on collective redundancies or on the transfer of an undertaking (TUPE), as well as claims for statutory maternity, paternity, adoption or shared parental pay.  
  • How to start a settlement agreement process with an employee

    To begin the process, an employer needs to ask the employee if they are willing to have a protected conversation, as per section 111A of the Employment Rights Act 1996. The protected conversation should consist of a discussion about what has led to the proposal of the settlement agreement (that could be concerns the employer has about the employee, for example in relation to conduct or performance, or it could be that the settlement agreement is an alternative to a redundancy process). Once this has been discussed, a settlement offer should be made by employer to employee. The employee should then be given at least 10 days to consider whether they want to accept that offer.
  • What happens if an employee breaches a settlement agreement?

    If the employee breaches any material terms of the settlement agreement, the employer may be able to claim for breach of contract to rectify the breach and may also seek to recover any payments made to the employee under the agreement terms. If the employer is successful, the employee may be ordered to repay all or some of the money they have been paid and they may also be required to repay the employer’s legal fees.
  • What’s an average settlement agreement payout?

    There are no fixed rules in terms of what offer should be made under a settlement agreement, so this will vary from case to case.
  • What is the difference between a compromise and settlement agreement?

    They are the same thing. The phrase ‘compromise agreement’ has been replaced by ‘settlement agreement’.

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