What is a Settlement Agreement and When Can They be Used?
Settlement agreement stock image

What is a Settlement Agreement and When Can They be Used?

A settlement agreement is a contract between an employer and employee (or former employee) that is used to record terms of agreement between the parties following the termination of employment. The main purpose of settlement agreements is that in signing them, the employee waives their rights to bring a claim against the employer in a Court or tribunal, and they usually involve an agreed payment from the employer to the employee.

To be valid, the agreement must be in writing, must relate to particular potential complaints or proceedings, and must state that the relevant statutory conditions regulating settlement agreements have been met. Most importantly though, the employee must have taken advice from a relevant independent adviser, who must be named in the agreement.

The cost of your independent adviser is usually covered by the employer. There should be a clause within the proposed settlement agreement that stipulates this and states the amount that they are willing to pay.

There is specific criteria that the relevant independent adviser has to meet. This includes the stipulation that they must have a current professional indemnity insurance policy in place, and they have to be identified in the agreement so that they can sign to say that they’ve provided advice.

They can be used in most circumstances relating to the termination of employment, including a redundancy situation, a gross misconduct dismissal, a capability dismissal, or even a mutually agreed termination.

If you’re entering into a settlement agreement, you should remember that you’re doing so voluntarily – which means that the terms of the agreement are negotiable. So, if your employer offers a payment that you don’t consider to be fair, you can either negotiate this, or your independent adviser can do so on your behalf.

In some situations, your former employer may offer you less than your statutory and/or contractual entitlement.  Usually, your settlement agreement should include a compensatory payment in addition to your statutory or contractual entitlements.  These statutory and contractual payments can be made up of notice pay, statuary redundancy pay, holiday pay, bonuses etc.  A compensatory payment is a separate payment altogether.

So, it is worth noting that in signing the settlement agreement you are signing away your rights to bring a claim against your employer – which may not be a good idea if your employer is only offering payments equal to or less than your statutory and contractual entitlements. Again, your independent adviser is the best person to ascertain whether the payments that you’re being offered under the agreement are fair in all the circumstances.

Your independent adviser will also handle tricky bits like distinguishing which payments are taxable and which are tax free, based on whether the payments are compensatory or salary payments. Compensatory payments are made for the loss of your job, and the first £30,000 will be paid tax free. Anything over that amount will be taxed in the usual way, along with all other payments (including notice pay, holiday pay and bonuses).

In general, your independent adviser will help you to consider whether your settlement agreement is fair in all the circumstances. For example, if you’ve got a potential or actual personal injury claim, your adviser will be able to ensure that the wording of the agreement excludes this type of claim from the list of claims you are relinquishing, to ensure you will still be able to pursue it.

Overall, it’s fair to say that settlement agreements are contracts that formally sets out the terms of the termination of your employment relationship. Your independent adviser is a requirement but is also there to ensure that the contract is worded and signed off in the manner that most benefits you.

If you are seeking advice relating to your employment rights or a settlement agreement, feel free to get in touch with us. You can call us on 01782 652300 or drop us an email at lawyers@tinsdills.co.uk.