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What is a settlement agreement?

Lady and a man passing documents

Employers will often offer employees who are leaving (whether by way of resignation or dismissal) a settlement agreement.

A settlement agreement effectively buys ‘peace of mind’ for the employer because if the employee signs it, they expressly agree that they will not bring any legal proceedings against their former employer arising out of their employment or its termination (with limited exceptions relating to latent personal injury claims and claims relating to accrued pension rights).

In return for this waiver of their legal rights, employees will typically receive an enhanced payment over and above their statutory / contractual entitlements (an ‘ex gratia’ payment).  Such ex-gratia payments can normally be paid tax free up to a maximum of £30,000 (including any statutory / contractual redundancy entitlements). 

The agreement can also contain provisions relating to other termination arrangements such as return of company property, deletion of social media contacts, confidentiality and so on. 

Employees who are asked to sign a settlement agreement must seek independent legal advice on the terms and effect of the document.   This is to ensure that the employee fully understands that by signing the agreement, they are waiving their legal right to bring any claims against their employer. 

The offer of a settlement agreement by an employer isn’t necessarily an admission that the employer has done something wrong, or that the employee has a claim.  It is simply a way of ensuring that if the employer is going to pay a sum of money over and above that which it is legally required to do so on termination, it wants to be 100% certain of a clean break between the parties.  

Often, employees don’t have any valid claims to bring in any event, and it therefore makes perfect sense to sign the agreement.  On occasions, however, there will be an ongoing dispute between employer and employee, and the employee has a legitimate and valuable claim.  Although the prospect of litigation is not appealing for most – particularly given the delays in the Tribunal system at the present time – an employee with a valid claim will seek to renegotiate the terms of the agreement or reject it completely and proceed down the litigation route.

Clearly an employer can dismiss fairly and lawfully without issuing a settlement agreement – and many will do so.  However, given the time and expense that can be incurred defending a spurious claim which has ben issued by a disgruntled ex-employee, settlement agreements make a good deal of sense in many circumstances.  We can draft bespoke settlement agreements for employers at competitive rates. Equally, we can provide advice to employees who have been offered such an agreement.  Contact our employment team for more information on 0345 20 73 72 8 or info@thursfields.co.uk

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