April 17, 2020

A Settlement Agreement (formerly known as a Compromise Agreement) is a contract between an employer and employee upon termination of employment, which sets out the terms of the agreement reached between them.

What is the purpose of a Settlement Agreement?

It is not uncommon for employee-employer relationships to break down beyond repair. A Settlement Agreement gives both parties the option to agree on the terms at the end of an employee’s employment.

By signing the Settlement Agreement, the employee agrees to give up their rights to pursue any claim in the Employment Tribunal in relation to their employment and its termination, in return for a fair payment made by employer. The value of the payment will depend on the severity of the relationship breakdown and the length of service.

Settlement Agreements & redundancy

Settlement Agreements are also commonly used in circumstances where a business undertakes a reorganisation that leads to a number of employees being made redundant.

This is legal and sometimes preferred by employees as it allows employees to move on quickly with a sum of money that is appropriate to their situation and seniority. It also avoids the stress of going through the redundancy process. From an employer’s point of view, this also avoids the chance that an employee pursues a claim in an employment tribunal, which is a long and costly process.

Legal requirements

There a number of legal requirements that need to be met for a Settlement Agreement to be valid and binding. For example, the Settlement Agreement must be in writing and the employee must have obtained independent legal advice from a qualified lawyer prior to signing the agreement. This is essential as when the agreement has been signed, the employee will find it difficult to pursue any later claims against the employer in an employment tribunal.

You should know…

It is important to note that there are a number of claims which cannot be waived in a Settlement Agreement, for example an employee’s accrued pension rights.

It is essential that any claims an employee could have pursued regarding their employment are adequately addressed in the agreement, and reflected in the settlement figure, ensuring that gives fair value for their role and length of service.

Terry Jones can review your Settlement Agreement at a time and location that works for you. Please contact our employment team on 01743 218 450 or email enquiries@terry-jones.co.uk  

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