Q: Are Settlement Agreements the same as Compromise Agreements?
A: Yes. The terminology was changed on 29 July 2013 but they are effectively the same.
Q: What is the effect of an employee signing a Settlement Agreement?
A: Settlement Agreements are legally binding agreements which are used to formalise a full and final settlement between an employer and an employee. The consequences of an employee signing a settlement agreement will be that they are then prevented from bringing or pursuing a claim before an Employment Tribunal in connection with their employment.
Q: When are Settlement Agreements used?
A Settlement Agreement is a useful tool for an employer to terminate an employee’s employment without worrying about having to face a future claim. They are often used where the employer and/or employee agree a termination in exchange for a termination payment or some other benefit to be given to the employee eg a reference.
Q: What are the legal requirements which make Settlement Agreements binding and enforceable?
A: Settlement Agreements must comply with a number of conditions. Most importantly Settlement Agreements must be in writing and the employee must receive independent legal advice as to the implications of the proposed agreement and the effect the agreement will have on an employee’s ability to pursue their rights before an Employment Tribunal.
Important Points to Consider When Drafting a Settlement Agreement
There are many things to consider when drafting a Settlement Agreement, but some of the most frequent issues which require consideration are listed below:
- Tax implications of the termination payment
- Provision of a reference
- Cost contribution for the independent advice
- Reminder of existing restrictive covenants and confidentiality clauses and provision for any new clauses
- Provision for resignation from office of Director
- Tax indemnity
- Exemption for future personal injury and accrued pension right claims
We can help you negotiate and draft a settlement Agreement. You must be careful before presenting your employee with an Agreement. Failing to handle settlement negotiations in the right way could lead to a claim for constructive dismissal and/ discrimination in some circumstances.