Settlement Agreements – what are they?
23rd August 2021
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Employment Solicitor Alexis Lane helps explain what Settlement Agreements are from both an employer and employee perspective.

A Settlement Agreement (previously known as a Compromise Agreement) is a voluntary legally-binding written contract, where an employer and employee terminate employment on agreed terms. It is a legal requirement that an employee receive specialist legal advice before signing a settlement agreement, from an independent solicitor of their choice, which is normally paid for by their employer.

How do Settlement Agreements work?

Employers may wish to offer a Settlement Agreement to employees they are making redundant, where there exists a mutual agreement to terminate and to avoid going to an Employment Tribunal or risk other forms of legal action.

Should an employer need to terminate an employee’s employment, using a Settlement Agreement it enables them to offer an employee a sum of money to facilitate an agreed termination of their employment, and help protect their business against future claims as the employee will contract to refrain from issuing claims listed in the agreement, such as unfair dismissal.

Why use a Settlement Agreement?

In essence, Settlement Agreements financially compensates the employee whilst limiting the employer’s liability so that a line is drawn under the end of the employment relationship with a “clean break” being achieved. For a settlement agreement to be enforceable it is a requirement that the employee receive independent legal to advice on the terms and effect of signing a Settlement Agreement and where appropriate the legal adviser may negotiate the terms. This legal advice is normally paid for by the employer in terms of a financial contribution.

How we can help

It is important that both the employer and employee clearly understand the terms of the Settlement Agreement and what they are agreeing to. Our wealth of employment law experience can help employees understand the ramifications of signing a Settlement Agreement and we also offer advice on whether the settlement proposed is reasonable in light of the background to the termination of employment and can negotiate the terms and financial settlement on behalf of the employee.

For employers, we can help draft a Settlement Agreement and advise on the terms to reflect the background to the termination and can negotiate on their behalf should the terms or financial settlement be challenged by the exiting employee.

If you would like more information on Settlement Agreements or have one reviewed by a solicitor to check it is fair, please contact Alexis Lane in our Employment Department.

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