What is a Settlement Agreement?

It doesn’t matter how positive you think your company culture is, as a business owner with employees working for you - you never know when conflict or disputes might occur. That’s when preparing a settlement agreement might come in handy.

So, what is a settlement agreement, how can it help protect your business and what does it include?

What is a settlement agreement? In short, a settlement agreement, formally known as a ‘compromise agreement’ or ‘termination agreement’, is a legally binding contract between an employee and employer that settles any claims the employee might have against the employer. While settlement agreements can be proposed by either the employer or employee, in most cases it tends to be the employer.

In general, a settlement agreement means that the employee will waive all of their employment rights, including unfair dismissal and discrimination claims, in exchange for a financial compensation payment. This is a benefit to the employer should there be a risk factor to consider with any ongoing employee dispute.

For a settlement agreement to be valid, it’s essential that HR legal advice is sought. For further support, you can contact me to help you take the necessary next steps.

Does a settlement agreement always mean the end of employment? A settlement agreement is usually used as part of a redundancy situation, to end employment on mutual grounds after a dispute or ongoing dispute. For example; if an employee is not performing well, instead of both parties undergoing a long capability process, the employee and employer agree to bring the employment to a quick end using a settlement agreement.

What is included in a settlement agreement? A settlement agreement must contain a clear breakdown of the payments which have been mutually agreed upon by both parties (employee and employer). It should also state whether these payments can be paid to the employee tax-free – it’s worth noting that payments of up to £30,000 compensation can often be paid tax-free, also known as an ex-gratia payment.

A settlement agreement generally includes:

• Some sort of payment (compensation)

• Any entitlement to notice (subject to contract)

• Any accrued holiday which has not yet been taken, (but accrued)

• Any bonuses and commissions owed, (where due dependent on the circumstances and Company policies)

• Any necessary pension contributions

• A contribution towards a legal advisor reviewing the settlement agreement on behalf of the employee, subject to Company discretion on the amount. In most cases either £250 – £500 is used as an approximate figure.

Other elements included in a settlement agreement includes:

• A reference (pre agreed by both parties)

• A confidentiality clause

• Post-employment agreements

Does the employee need to sign the settlement agreement? The settlement agreement is usually signed by the employee, their legal advisor, and a senior manager/director of the business. Once complete, the agreement becomes legally binding.

Are you an employer needing advice regarding settlement agreements? Do you need professional HR support? Bee Connected HR is here to listen to your individual circumstances, so together, we can decide whether the settlement agreement route is the right option for you and your business. Get in touch today to find out more.