Settlement Agreement

A settlement offers certainty, a quick conclusion, lower costs, and managed risks. A tribunal on the other hand offers no certainty and you might lose or win. A settlement offers certainty, lower costs & managed risks. A tribunal on the other hand offers no certainty on lose or win. Law is explained simple & easy. Read on.
  • Author: Siva
  • Last updated: October 18, 2022
  • 5 Minutes
settlement agreement its best practices and the legal regulations for the businesses in the UK explained by Papershift

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A settlement or compromise agreement is a formal agreement that can be made between an employer and an employee that supports and records the mutual termination of a contract of employment. It is most effective when both parties seek to settle a dispute that has arisen between them.

This article will discuss exactly what settlement agreements are and how they can be used. 

Let’s begin. 

What is a settlement agreement?

A settlement agreement is offered by employers to settle employee claims regarding workplace issues like discrimination. The employee must be advised by a qualified independent legal adviser on the agreement. Usually, a settlement agreement will involve the employee’s employment coming to an end.

Settlement agreements are all about achieving a legally binding settlement between an employee and employer on agreed terms.

Why do employers offer settlement agreements?

Usually, an employer will offer a settlement agreement for speed, risk management, certainty, and closure.

The general idea is that the settlement agreement achieves a clean break with the certainty that in return for the payment, the employee will not be able to bring a claim to a Tribunal.

When are settlement agreements used?

There are a few different situations where a settlement agreement is offered by an employer. These include:

  1. Redundancy situations are where the employer is set to pay more than the statutory entitlement.
  2. Long-term ill-health, where the employee is unlikely to be fit to return to work in the foreseeable future
  3. Disciplinary or grievance situations. Offering a settlement agreement can be an efficient, cost-saving, and speedy way to terminate employment.

Does an employee have to leave a company if they accept a settlement agreement?

No, they do not. Settlement agreements can be used to settle existing disputes with employees, without the employee leaving the company.

Does an employee need to have a solicitor accept a settlement agreement?

Get a solicitor
Yes, they do. An employee will need a solicitor because the law requires that they have independent legal advice from an independent qualified adviser. Without this advice, a settlement agreement would not be a binding statutory settlement agreement.

Settlement agreements are not binding unless the employee receives independent legal advice on the terms and effect of the agreement.

Do employees have to pay tax on settlement agreements?

Generally speaking, any payment an employee receives as part of a settlement agreement that falls under their normal employment contract like salary, holiday pay, bonuses and payment in lieu of notice are taxable.

Taxation Info
Any termination payment, on the other hand – including a redundancy payment, is not taxable up to £30,000 in the UK.

Will accepting a settlement agreement affect an employee’s chances of getting a job reference?

It may come as a surprise to hear that there is no general right to a job reference when you leave employment with a company. If you have been offered a settlement agreement you may want to seek an agreed reference wording as part of the settlement negotiations.

Do employers pay legal fees for settlement agreements?

Yes… usually. It’s standard for employers to pay a reasonable sum to cover the employee’s independent solicitor’s advice on the terms of and effect of the settlement agreement.

Is a settlement agreement the same as a redundancy?

While an employee will receive a pay out if they are made redundant, redundancies and settlement agreements are not necessarily the same. Redundancies are an end to an employee’s contract with a payment that places no covenants on them. A settlement agreement is often offered at an enhanced rate that will place restrictions on what the employee can do or say once their contract has ended.  

Can an employee request a settlement agreement?

Yes, but usually an employer will begin a settlement agreement process to resolve a dispute or agree on severance terms.

When can an employer make a settlement agreement offer?

An offer can be made at any time during or after the employment of an employee. 

As an employer, should I offer a settlement or risk an employment tribunal?

A settlement offers certainty, a quick conclusion, lower costs and managed risks. A tribunal on the other hand offers no certainty and you might lose or win. On top of this it can often take several months or even years to get to a final hearing. As an employer it’s important to weigh up the risk and reward of a tribunal versus the settlement carefully.

Are settlement agreements legally binding? 

The agreement must meet a number of statutory requirements in order to be deemed valid. The law relating to such agreements is complex and proper professional advice should be sought. If the settlement agreement does not meet all of the points below, it will be deemed invalid:

  1. It must be written and must detail the particular complaints which the agreement is now settling.
  2. The employee must have received advice on the terms and effect of the agreement from an independent solicitor.
  3. Any discussions between the parties relating to the agreement should also meet certain requirements. Such discussions should happen whilst bearing in mind that they could be used as evidence in legal proceedings if the agreement does not happen for any reason.

Should employees accept settlement offers?

That really does depend on the quality of the offer versus the alternatives. If the employee has a strong case worth more than the settlement offer, then it may be prudent to reject the offer. 

On the other hand, a quick resolution might make it worth taking the settlement versus the risks, time and possible costs of a tribunal. We recommend any employee offered a settlement agreement talk to a specialist employment solicitor and weigh up the merits of the offer against the alternative options available before making a decision.

What constitutes a good settlement offer?

It depends on the situation. In some cases, it’s all about the money. In others, there may be non-monetary considerations, like a reference or being released from post-termination restrictions.

Start with basic contractual and statutory rights and then assess what else the employer is offering on top in exchange for the signing of a settlement agreement.

How do employees respond to a low settlement offer?

If the offer isn’t anywhere near the right ballpark, an employee may decide to reject it and make it clear that they see no point in continuing negotiations unless a far better offer is made. 

Another option is to make a sensible counteroffer with room between the two positions to allow for further compromise. Pitching the offer at a level that makes sense for both sides is the art of a good settlement agreement negotiation.

In conclusion

Settlement agreements are complicated matters and need careful consideration.

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Written by Siva

I write & describe the value & benefits delivered by Paperhift's rota planning, staff time tracking, and employee payroll management software. Especially useful for Shift Planners, Rota Managers, Team Admins, and HR Teams :-)