Settlement Agreement

What is a Settlement Agreement?

  • Settlement agreements are legally binding contracts that waive an individual’s rights to make a claim covered by the agreement to an employment tribunal or court.
  • The agreement must be in writing.
  • They usually include some form of payment to the employee and may often include a reference.
  • They are voluntary.
  • They can be offered at any stage of an employment relationship.

The reason it has to be a settlement agreement (rather than just an ordinary contract or agreement) is that the law gives employees special protection in these situations. The protection means that the only valid way an employee can waive their ability to make a statutory employment tribunal claim against their employer, is through an agreement which takes a specific legal form and on which the employee receives advice from a legal adviser. This special agreement is called a settlement agreement.

What is in a Settlement Agreement?

A settlement agreement sets out the terms that have been agreed between an employer and employee in relation to the termination of employment. This will usually involve the employer agreeing to pay the employee some money in exchange for the employee agreeing not to bring any employment related claim against the employer. The agreement will also:

  • Record the employment claims the employee is being asked to waive;
  • Record the date of termination of employment;
  • Record the termination payment to be made to the employee;
  • Contain provisions as to the tax treatment of the termination payment, and an indemnity from the employee that they will be responsible for any tax which is due over and above what the company actually deducts;
  • Contain standard provisions on return of property, confidentiality and not making derogatory statements about the company after termination;
  • Contain a clause providing that the company will contribute a sum of money towards the employee’s legal fees (which the legal adviser invoices directly to the employer).

There may also be further terms that are individual to the employee concerned.

Legal Requirements

  1. The agreement must be in writing;
  2. The agreement must relate to a particular complaint or particular proceedings.
  3. The employee must have received independent legal advice on the agreement and in particular on its effect on their ability to pursue the statutory rights in question.
  4. The adviser must be identified in the agreement.
  5. The adviser must have insurance in relation to the advice.
  6. The agreement must state that the conditions regulating settlement agreements in the relevant legislation have been met.
  7. The employee and adviser must both sign the agreement.

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