Settlement Agreements: FAQ’s by Employers

Reasons to choose Wilson Browne

A Settlement Agreement (formerly known as a compromise agreement) is a legally binding agreement between an employer and an employee who agrees not to bring a tribunal claim against the company in return for financial compensation.

Settlement Agreements are typically associated with the ending of someone’s employment and are issued either shortly before or after the employment has ended. In some circumstances, they can be used when employment is going to continue, but let’s focus on a situation where you are bringing an employee’s employment to an end.

To be binding, the employee must get independent legal advice before signing – they must be allowed to choose their own legal advisor.

When should we consider using settlement agreements?

Settlement Agreements should be considered if you need to bring someone’s employment to an end but would like to do so without the fear of a tribunal claim landing at your door.
It is most suited to those who are risk averse but equally suits those employers who want a swift conclusion!

What is it going to cost us?

To be legally binding, employees are entitled to the following which will always be payable on termination even without a Settlement Agreement:

Notice pay
Payment for accrued but untaken holidays
Any other contractual benefits

In addition to the above, the employee must receive a severance payment as compensation for their loss of employment*. These payments are tax free up to £30,000.

It is customary for employers to contribute towards the cost of the employee’s independent legal advice – this is usually between £350 to £500 plus VAT, depending on the seniority of the role etc.

*Please note in redundancy situations, an employee’s statutory redundancy pay must be enhanced to act as sufficient consideration (or financial incentive!) to take the Agreement.

What are the benefits of settlement agreements?

You have the certainty of knowing that a tribunal claim is not on its way to you from the employee in question.

This in turn alleviates the stress, strain, costs and the investment of management time that goes into fighting off claims.

In addition, the Agreement will include a provision to protect the Company’s confidential information. Given that tribunal judgments are published online for the public to read, it is a great way of avoiding bad publicity.

How do we approach discussions about settlement agreements?

These conversations should be protected and approached on a “without prejudice/off the record” basis in accordance with s111A of the Employment Rights Act 1996. However, this protection does not blankly apply to all situations and all tribunal claims.

Having this conversation with an employee makes your intentions clear and it is difficult to rectify once the horse has bolted. We, therefore, recommend that you seek specialist advice on how to approach the topic with your employee(s).

What if the employee says no?

Employees do not have to agree to your proposal of a Settlement Agreement. If this happens, the Company would ordinarily continue with the process it had already started, for example redundancy process, formal performance management etc.

In the worst case scenario, the employee may decide to bring a tribunal claim if their employment is terminated without a Settlement Agreement. But not all is lost – if it is a claim for ordinary unfair dismissal and on the proviso that those settlement discussions were protected, the employee should not be able to rely on your “off the record” conversations as evidence of their claim.

Can you assist us with drafting a settlement agreement?

Yes, absolutely! At Wilson Browne Solicitors, we can take the stress away from you by drafting a bespoke Agreement to afford your Company the utmost protection from all employment law angles.