Employee Settlement Agreements

A settlement agreement is a contract between an employer and employee which brings the employment to an end on a no-fault basis.  By signing the agreement, which used to be known as a compromise agreement, the employee agrees to waive their statutory employment rights and will be prevented from bringing employment tribunal claims.  In exchange, the employer pays the employee a settlement payment which can often be paid tax free.

The settlement agreement must be recorded in writing and must contain certain terms to be binding.  The employee must seek legal advice from an independent advisor prior to signing, usually from a solicitor

We advise both employers and employees on settlement agreements.  It may be that one of our employer clients will approach us to assist them with agreeing exit terms for an employee.  We will draft the agreement, advise on the process and negotiate terms with the employee’s solicitor on behalf of our client with their instructions.  But we also advise lots of employees each year on the terms of their settlement agreements.

Where larger scale redundancies are planned at a particular site, we are happy to work with employers to provide advice to larger groups of employees – as in this case study: Site closure.

When might we offer a settlement agreement?

Settlement agreements can be a quicker and lower risk means of ending employment when the relationship has broken down or there is an underlying dispute.  A settlement agreement can be offered to try to avoid the time with dealing with a tricky situation or the costs/risks of a potential employee claim. 

The employee must be willing to enter into the agreement, without any pressure from the employer.  

Settlement agreements are often offered when redundancies are planned: this avoids having to dismiss the employee and in some cases, may avoid the need to go through a formal process, as the employee may volunteer to take a settlement agreement with an enhanced payment. 

Another common scenario is to offer a settlement agreement as a means of avoiding a employee performance management process.  An amicable and agreed parting ways in this scenario may suit everyone, to avoid a potentially lengthy performance process. 

Occasionally, a disgruntled employee may indicate as part of a grievance or dispute that they are prepared to enter into a settlement agreement.

Are there any other advantages with offering settlement?

Offering a settlement agreement can avoid a situation where the workforce may be unsettled, for example having to put other employees at risk of redundancy, can be unsettling for everyone and affect morale, so in some cases offering a confidential settlement agreement to those employees who are more likely to be selected means that discussions can be limited to fewer employees. 

The agreement can include confidentiality clauses to protect business information and prevent the employee from bad mouthing the employer or telling lots of people about the underlying issue.  It also removes the uncertainty and worry about whether employee may bring a claim which would be in the public domain. 

Confidentiality provisions must be carefully drafted and are subject to certain safeguards.  Certain confidentiality clauses are unlawful – for example any attempt to prevent an employee from whistleblowing or making other types of disclosure. 

What are the benefits to employees for entering into a settlement agreement?

The main benefit is likely to be the enhanced settlement payment, which can be paid tax free up to £30,000, provided the employee has received their notice pay taxed as earnings.  It is common to include agreed reference wording in the settlement agreement, and in lots of cases, this will be very valuable to the employee.  The parties can agree wording for an announcement to be made to colleagues or other contacts, which allows the employee to feel in control of what others will be told about the reason for their departure. 

If you would like advice on settlement agreements, please contact our employment team.  As well as drafting the agreement and negotiating terms on your behalf, we can advise on whether a settlement agreement is a good option in each case and take you through the process.