What is a Settlement (Compromise) 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 employees enter into Settlement Agreements?

Settlement Agreements may be offered in circumstances where there is an employment dispute between the parties. 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.

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 most, if not all, of the fees incurred by the employee seeking legal advice on the terms and effect of the Agreement. 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 your claims against the employer, and the likely sums an Employment Tribunal may reward. In addition, you may also wish to consider how long it may take you to find suitable alternative employment and the losses you will incur in the meantime.

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, to ensure that the employee does 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 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 advise employees on the terms of their Settlement Agreements, providing advice on the way it is drafted and whether the amount of money that is being offered within the Agreement is reasonable in the circumstances.

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