Settlement agreements (formerly known as compromise agreements) are legally binding contracts made between an employer and an employee usually when an employment relationship comes to an end.   This can be due to redundancy, or simply one or both parties wanting to bring the employee’s employment to an end as amicably as possible.  In exchange for a compensation payment from the employer, the agreement ensures that the employee cannot pursue any potential claims to the employment tribunals.

A settlement agreement is not legally binding unless the employee has taken independent legal advice on its terms and effect and the employee’s solicitor has signed an advisor’s certificate which is usually annexed to the back of the settlement agreement.  The employer makes a contribution to the employee’s legal fees, typically between £350 - £500 plus VAT.  If the negotiations become protracted or in the case of senior employees or directors, the employer’s contribution to the employees legal fees is often higher.

It is essential that the employer issues the employee with a properly drafted settlement agreement.  If the legal requirements are for a valid settlement agreement are not in place, then the settlement agreement will be invalid which may work to the employee’s advantage.  Particular attention needs to be given to the list of notified claims that the employee is expressly waiving, and to the tax treatment of the payments. It is not uncommon for settlement agreements to be incorrectly drafted with regard to the tax treatment of the pay in lieu of notice and compensation payments clauses. Inadvertent mistakes can still give rise to problems with the Inland Revenue for both the employer and the employee.

It is important that the employer takes legal advice prior to raising the often sensitive subject of a settlement agreement with the employee, as very often the way in which is it approached and proposed to the employee has a significant impact on whether or not agreement will be reached with as little disruption and loss of goodwill as possible in the circumstances.  

I have a considerable experience in advising employers on settlement agreements and regularly give guidance on all the terms, including the amount of compensation offered, the claims to be settled, the tax treatment of the payments, post termination restrictive covenants, confidentiality clauses and the reference.

I advise employers on a regular basis on settlement agreements arising from a variety of circumstances and ranging from those which are simple and relatively straightforward to much more complicated agreements where for example the employee may have raised a grievance about a range of serious issues and has been absent from work for some time due to sickness. Particularly at more senior levels it may simply be that the employee or director is no longer performing to the board’s satisfaction and their removal from their post needs to be achieved as swiftly and amicably as possible.

If I can help your organisation with any of these issues, please call me today on 01892 538762 or 0790 069 5142.