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Settlement Agreements

The Employees basic guide to settlement agreements
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Settlement Agreements – The Employees basic guide to settlement agreements


What is a settlement agreement?


A settlement agreement is a legally binding document between an employee and employer that records the agreement when the employment relationship has come to an end.


This can be either because of redundancy, a disagreement or if there is a break down in the relationship or there are some kind of disciplinary issues ongoing including the lack of trust and confidence. A settlement agreement is used to agree the terms under which the employee will leave their employment.


A settlement agreement is normally used as an alternative to pursuing legal action against the employer and under the agreement an employer will usually pay compensation to the employee and in return, the employee agrees not to bring a claim against the employer.


What is a Compromise Agreement?

A compromise agreement is a legally binding agreement between an employee and employer when the parties want to set out the terms and conditions reached when a contract of employment is to be terminated or a dispute is to be resolved.


A compromise agreement is the old term that was used before the introduction of the new term settlement agreement, which was on the 29th July 2013.


What is the difference between a Settlement Agreement and a Compromise Agreement?


Prior to 29th July 2013, Settlement Agreements were known as Compromise Agreements and in practice; there is very little difference between a Compromise Agreement and a Settlement Agreement.


One real difference is under the terms of a Settlement Agreements, discussions about the offer of such an Agreement cannot be used in an ordinary unfair dismissal claim unless there has been improper behaviour by the employer.


Do I need legal advice for a settlement agreement?

In order to be legally binding, you must receive legal advice as to the terms and effect of the settlement agreement, and it is normal practice for your employer contribute to your legal fees.


Once you sign an agreement you will be waiving all your rights to bring an employment claim, which is why you need legal advice.


A specialist employment solicitor will be able to advise you on the merits of your potential claim and the amount of money you would be likely to receive at an Employment Tribunal.


They will also be able to identify any discrimination against you of which you might not be aware and therefore may be able to increase the offer because of an amount that could be awarded for injury to feelings.


Do I have any rights if I sign a settlement agreement?

The signing of the settlement agreement will mean that you can no longer pursue an employment related claim against your employer in an employment tribunal. This is why it’s so important that you get the right legal advice from a specialist employment law solicitor.


It is so important to let your solicitor know the details of any potential claim you may have as this will help in the negotiations of the settlement agreement.


Is the settlement agreement tax free?

Whether you pay tax or not will depend on how the termination payment is made up. Contractual payments, such as salary, holiday pay and bonuses will be taxable.


As a general rule, however, the first £30,000 of the termination payment is compensation for loss of employment and is tax-free. Redundancy payments up to £30,000 (both contractual and statutory) are usually tax-free.


Payments in lieu of notice can be tax free, provided that the employer does not have a contractual right to make a payment in lieu of notice and, in a redundancy situation, provided that the employer does not usually make a payment in lieu of notice as a matter of course. Benefits such as continued use of a mobile phone or company car are usually tax-free.


Will I get a reference if I sign a settlement agreement?


There are no legal obligation on any employer to provide a reference for an employee or ex-employee and employers can refuse to provide a reference if they want to.


It is, however, common to include a term in a settlement agreement stating that the employer will provide a reference that is agreed by both parties. The reference is usually annexed to the agreement.


The reference is very often basic and only provides minimal information such as start date, finish date and job title.


Should I negotiate on the terms of the settlement agreement?


Most of the times employees are very happy with the offer made to them by their employer, especially as the offer can damage the relationship moving forward. They just want to sign the agreement and move on and if you are in that position then great.


There are times, however, when the employee feels that the offer is not what they deserve or appropriate in the circumstances and it may be on those occasions that is right to negotiate the agreement.


How you negotiate is always crucial from raising a grievance to the threat of making an employment tribunal claim.


It is important to keep in mind that:


  • Any employment tribunal claim and process is likely to take between 3 to 6 months and will take longer to recover any money;
  • Employment Tribunal proceedings can be a very stressful time;
  • There is never any certainty that you will be successful in an Employment Tribunal hearing:
  • There is a cost to taking employment tribunal proceedings.


It can be sometimes more productive to try the softly softly approach and use your skills of persuasion as this will bring the whole process to a quicker conclusion.


Taking advice from your solicitor on the best strategy is always advisable.


For expert advice call and book a telephone consultation with an employment law expert.