What is a Settlement Agreement?
A settlement agreement (formerly called a compromise agreement) is a legally binding contract between you and your employer that typically ends your employment on agreed terms. In exchange for a financial payment and possibly other benefits, you agree not to pursue legal claims against your employer.
When Are Settlement Agreements Used?
Employers offer settlement agreements in various situations including redundancy, performance issues, workplace disputes, or simply as a means of parting ways amicably. They allow both parties to avoid the cost, time, and uncertainty of employment tribunal proceedings.
Key Terms to Review
Settlement agreements typically include compensation payment (which may be partly tax-free), payment of notice period, holiday pay, reference terms, confidentiality clauses, and confirmation of your final employment date.
Tax-Free Payments
The first £30,000 of a termination payment is usually tax-free, but this does not include payment for your notice period, outstanding holiday pay, or other contractual entitlements, which are taxable.
Independent Legal Advice is Essential
For a settlement agreement to be valid, you must receive independent legal advice from a qualified adviser. Your employer typically pays for this advice. A solicitor can assess whether the offer is fair and negotiate better terms on your behalf.
Negotiating Better Terms
The initial offer is often negotiable. An experienced employment solicitor can assess the strength of any potential claims you might have and use this to negotiate a higher settlement payment or better terms.