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What Is A Settlement Agreement?

28th March 2018

What Is A Settlement Agreement?

A settlement agreement is a legally binding agreement between an employee and an employer which settles a claim that the employee has against the employer. It is usually used when the employment is coming (or has come) to an end. But it can also be used where the employment is continuing and both parties want to settle a dispute (such as a grievance).

If you are an employer, you might want to use a settlement agreement where an employee is not performing well, but you (and the employee) do not want to go through a drawn-out performance management process. If you and the employee are willing to bring the employment to a quick end on agreed terms (including any financial settlement), then a settlement agreement is the best means of achieving that.

The terms of a settlement agreement will be agreed between employer and employee and set out in writing. The document will need to be prepared and customised for the specific circumstances of the situation and the employee. For instance, it should identify any claims which the employee agrees not to pursue in exchange for the agreed payment. It will usually have a confidentiality clause, and – often important in communities or sectors where news spreads quickly – a clause preventing the employee and employer making derogatory comments about each other.

The settlement agreement should include a breakdown of the payments agreed and say whether any of them is paid to the employee free of tax. Payments of up to £30,000 compensation can be paid without tax being deducted. The document may also include the terms of an agreed reference.

What is vital is that the employee receives advice on the settlement agreement from an independent solicitor who is identified in the document (and whose fee is paid by the employer). If not, it will not be a valid settlement and the employee will still be able to bring a claim against the employer.

Settlement agreements are a way of ensuring that employer/employee disputes are concluded without either side needing to resort to formal legal action. However, the law relating to them can be complex, and whether you are an employer or employee it is always wise to take professional advice before seeking to agree terms.

Notes

​For more information about settlement agreements, click here.