What is a settlement agreement?

What is a settlement agreement?

A settlement agreement is a document which sets out the terms and conditions agreed by the two parties involved when they agree to settle a potential employment tribunal claim or other court proceedings.

The parties to a settlement agreement are normally an employer and employee (or a former employee).

When are they used?

Ending employment relationships

Settlement agreements are normally used to bring an employment relationship to end in a way that is mutually agreed upon by both parties, often with the intention to head towards a ‘clean break’.

Resolving disputes

Settlement agreements can also be used to resolve a dispute in the workplace without having to end an employment relationship.

Advantages of settlement agreements

• Swift and dignified end to an employment relationship

• Time, costs and stress saved for both parties in a tribunal claim

• Can provide compensation and sometimes a reference for employees

What are the key components of a settlement agreement?

Termination Details

Details such as the notice period, the last working day, handover responsibilities and any payment in lieu of notice to be made to the employee are often included.

Compensation

There will be an outline of any payments that will be made to the employee and often a payment schedule that specifies when and how the settlement payment will be made.

Confidentiality

There will be clauses that ensure that both the employee and their employer agree to keep the terms and existence of the agreement confidential, preventing any disclosure of confidential information obtained during the employment.

Non-disparagement

Non-disparagement clauses ensure agreement between an employer and employee that neither will make any negative remarks that will ruin the other’s reputation.

Future Claims

While the agreement is in place to ensure that an employee waives their right to make any claims against their employer,  the employee is still legally allowed to make claims for as accrued pension rights, personal injury claims that are unknown at the time of signing and a claim to enforce the terms of the settlement agreement should the employer be in breach of any of its terms.

References

The agreement might provide a mutually agreed-upon reference letter that the employee can submit to future prospective employers, although providing a reference in a settlement agreement is not a legal requirement that employers have to abide by.

You can also watch our video here to learn more about what your package ought to include.

Is a settlement agreement legally binding?

Yes, a settlement agreement is a legally binding contract once signed by all parties.

Do I need legal advice before I sign?

Yes. In a settlement agreement, the employee is waiving their rights to bring an employment claim against their employer. This sort of an agreement can only be legally recognised if a solicitor or a certified trade union representative has provided independent legal advice upon the terms of agreement and has ensured that the employee understands these terms before signing.

Obtaining legal advice will help an employee decide whether signing the agreement is the right choice for them or whether they would like to further negotiate with their employer for a deal that might suit them better.

How much are legal fees?

Most employers agree to contribute towards the cost of legal advice that their employees seek for their settlement agreements. This cost can range between £350 to £1,500 plus VAT depending on the complexity of the agreement.

Call a specialist employment lawyer  

Magara Law is an employment law firm with offices in Bicester, Banbury, Reading, and Paddington, London, and serves clients nationwide. 

For more information or to contact our employment law team at Magara Law, call 01869 325 883 or email roy@magaralaw.co.uk.