What is an Employment Compromise/Settlement Agreement?

Employment Settlement Agreements (formerly known as ‘Compromise Agreements') are agreements between an employee and employer that effectively sign away the employee's rights to any claims that they may have against the employer. Under the terms of the Settlement Agreement, the employee generally accepts a compensation sum from the employer in exchange for them agreeing to give up their rights in terminating their employment.

Why do employers enter into Settlement Agreements?

Settlement Agreements are a good way of settling most disputes when an employee’s employment is to be terminated. By entering into a Settlement Agreement, it provides the employee with a compensatory payment, in exchange for providing the employer with the assurance that the employee will not bring a claim against it at Court or Tribunal. However, not all Compromise/Settlement Agreements are entered into in order to settle disputes; they may be offered by the employer to ensure confidentiality surrounding the employee’s dismissal, early retirement or as part an enhanced redundancy scheme.

How is the Settlement Agreement concluded?

In order for a Settlement Agreement to be validly executed, the employee must seek independent legal advice. It is usual for the employer to pay a contribution towards the cost of the employee seeking legal advice. The parties may have already agreed the final form of the Settlement Agreement before the employee seeks legal advice, or a draft of the Settlement Agreement is prepared pending negotiations.

What compensation should be offered/accepted as part of the Agreement?

There is no ‘one size fits all’ answer and this generally depends upon the strength of the employee’s claims against the employer, and the likely sums an Employment Tribunal may reward. The first £30,000.00 of compensation for the loss of employment can be paid free from tax and national insurance deductions. Please note that contractual payments are not ‘compensation’ and should remain taxable. There should generally be a financial incentive for the employee to enter into the Agreement, over and above their basic contractual and statutory entitlements.

What other non-financial benefits are there for entering into a Settlement Agreement?

It is usual for the Settlement Agreement to include confidentiality clauses preventing the parties from discussing the contents of the Agreement and the circumstances leading up to it. The parties can also agree not to say unpleasant things about one another, something which can be beneficial where there has been acrimony between the parties. Further, the employer could offer a reference to the employee as part of the Settlement Agreement, something which could not otherwise be awarded by an Employment Tribunal.

In some cases the employer may choose to include restrictions on the employee, to ensure that they do not compete with the employer or do business with its clients for a certain period of time following the termination of employment. Settlement Agreements can also be used to reaffirm or remove existing restrictions already contained in the employment contract.

What can Franklins Solicitors LLP do to help in relation to Settlement Agreements?

We assist employers with the drafting of such Settlement Agreements to ensure that they are valid and comply with the appropriate legislation.

Next step