A Guide to Settlement Agreements from Askews Legal LLP

A settlement agreement is a legally binding contract between an employer and an employee.

It typically ends the employment relationship and waives the employee’s right to bring certain legal claims against the employer in an employment tribunal or court, usually in exchange for a financial payment.

When and Why Are They Used?

Settlement agreements can be used in lots of different situations to bring an employment relationship to an end. They are a reliable way to facilitate a clean break between the parties on agreed terms. They are commonly used:

To avoid a lengthy grievance or disciplinary process

In redundancy situations

• To resolve disputes (e.g. discrimination, unfair dismissal)

• Where there has been a relationship breakdown

• When both parties agree it’s best to part ways amicably

They are entirely voluntary—you don’t have to accept the agreement.

What Must Be Included for It to Be Legally Binding?

The agreement must be in writing and must clearly state which claims are being waived or compromised. You must get independent legal advice from a qualified legal adviser (often paid for by the employer). Your Adviser must be identified in the agreement and must hold professional indemnity insurance. The agreement must state that it complies with the applicable legislation which governs the types of claims being settled by the agreement.

What Might You Receive?

There must be some form of consideration or benefit flowing to the employee under the terms of the agreement, in return for waiving their legal rights to pursue a claim against their employer.

Usually, consideration is financial, in the form of compensation being paid to the employee which exceeds their statutory minimum entitlements. Occasionally, consideration may be non-financial, for example, provision of a reference, or an agreement to make a payment in lieu of notice rather than require an employee to work their notice.

Common payments include:

• Salary Notice Pay

Statutory Redundancy Payment

• Termination Payment – Often tax-free up to £30,000

Accrued Holiday Pay

Outstanding expenses, Bonuses or Commission

Legal Fees - Employers typically contribute £500+VAT towards the employee’s legal fees

Can You Negotiate?

Yes! You are under no obligation to accept the settlement agreement and can negotiate the terms if you believe there are good grounds to do so.