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Employment relationships can end for many reasons, such as dismissal, personality clashes, and redundancy. Businesses are increasingly using settlements to end an employment relationship. They are a good alternative to having to go through what can be a long drawn-out disciplinary performance, or redundancy process, followed by the ACAS Early Conciliation programme and uncertainty of tribunal proceedings.
In simple terms, it is a legally binding agreement between an employer and an employee. It normally results in the employee agreeing to waive their employment rights against the employer and not pursue any claims in an employment tribunal or other court. In return, the employee will usually receive a financial settlement, which will be set out in the agreement.
There are various circumstances where settlement agreements may be appropriate, and they are most commonly used to end employment on agreed terms or to resolve an ongoing dispute in the workplace. The agreement may be proposed by either employer or employee and can be offered at any stage of the employment relationship. They are voluntary on both sides, and neither party has to agree or enter into discussions regarding a settlement agreement. Employers should remember that employees continue to enjoy full employment rights up to the date of termination, which is set out in the agreement.
To be valid, a settlement agreement must be in writing, relate to a particular complaint, be signed by the parties, and record that the regulating requirements have been satisfied. The employee must receive independent legal advice on the terms of the agreement and their effect on their ability to pursue any rights in an employment tribunal.
Not all settlement agreements are identical, as the circumstances of each case will vary. Broadly speaking, there are elements common to most agreements, which include:-
Usually, sums that are agreed to be paid under a settlement agreement are paid within 28 days of the date of termination, which is set out in the agreement. Under current tax legislation, up to £30,000 of genuine compensation can be paid on a tax-free basis in certain circumstances. This will depend on the specific circumstances and payments that are being offered to you. An employer will deduct from the payments under the agreement any income tax and employee national insurance contributions that are required to be deducted by law.
The agreement is likely to include a legal fee contribution towards the cost of an employee’s legal fees. The value of this may vary, but it is commonly around the £350 plus VAT mark. The contribution can be higher depending on the circumstances and whether it takes longer to negotiate the final package and any relevant terms etc. Any discussions or negotiations between employee and employer in connection with the settlement agreement should be conducted on a without prejudice basis or as part of a protected conversation. This means that in the event that an agreement cannot be reached, those discussions cannot be used as evidence in any employment tribunal or other court proceedings.
Settlement agreements end an employment relationship quickly and quietly. They protect the business because the employee signs away almost all legal rights that they may have against the company and, in return, the business usually gives the employee more money than they would ordinarily be entitled to (this will depend upon the circumstances leading to the settlement agreement). As they offer a clean break and also avoid the time, costs and stress associated with protracted formal complaints or tribunal claims, they are regarded as an attractive and sensible commercial option.
On the downside, there are costs associated with the drawing up of the legal agreement and the legal fees for the independent advice. This may, however, be a small price to pay in the long term. However, where a settlement is not agreed upon, any ongoing employment relationship can be jeopardised and may have an adverse effect on employment relations in the wider workforce.
With the pandemic having caused strain on many businesses, settlement agreements are on the increase and employees should be cautious. If offered a settlement agreement, it is important to get advice and consider whether any issues of unfair treatment arise before you sign.
For further information on settlement agreements, please contact Lesley Purveur on 01636 703333 or This email address is being protected from spambots. You need JavaScript enabled to view it.
Larken & Co Solicitors is Authorised and Regulated by the Solicitors Regulation Authority - SRA Number: 53640