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What is a settlement agreement?

A legally binding contract between an employer and an employee, a settlement agreement  sets out the full terms between the two parties upon termination of employment. Once a settlement agreement has been signed by the employer, the employee and the employee’s solicitor it become binding and the employee will only be able to take the employer to an employment tribunal in very limited circumstances.

An agreement involves an offer from an employer to an employee to agree to mutually terminate the employment relationship, usually to pay salary to a certain date, to pay part or all of the contractual notice period and often make an additional ex gratia payment as an incentive to the employee to sign.

The agreement will provide specific details of termination payments which may include:

  • Your notice
  • A tax free sum
  • A redundancy payment
  • Holiday pay
  • Any bonus payment
  • Any other sums

In return for receiving these payments as part of a settlement agreement, you must agree not to bring any legal claims against your employer, such as unfair dismissal, discrimination or breach of contract.

A settlement agreement process is a legally binding document and as such you are required to seek specialist independent legal advice on the document before it becomes binding. You are not obliged to accept a settlement agreement. If you do choose to accept the terms of the agreement, it will need to be countersigned by a solicitor who confirms that you have had the clauses of the agreement explained to you.

Settlement agreements are the only way that employees can be prevented from exercising their employment rights in an employment tribunal.

When might a settlement agreement be offered?

Settlement agreements can be used in many employment situations, both during and after employment. They may be used to avoid a lengthy redundancy or disciplinary process, which can often be costly for an employer and cause contention with the employee.

An employer may also consider offering a settlement agreement as a means of bringing an existing dispute with an employee to a close.

Employers such as banks often use settlement agreements as a standard procedure, even where there is no question of a dispute, particularly if they are offering a considerable termination payment, such as a redundancy.

What are the benefits of a settlement agreement?

Settlement agreements are beneficial to both employers and employees. An employee will have the security of a termination document setting out what financial settlement they will receive, alongside other aspects of their employment termination such as a job reference. The employer has the guarantee that it will not have to deal with any future claims by the employee.

Settlement agreements can be utilised whether a term of employment has ended amicably or otherwise.

At Kew Law we have experience in drafting settlement agreements for employers and advising on the terms of settlement agreements for employees. Contact us for an initial discussion or to make an appointment. Call us on 0333 322 1000 or 0800 987 8156 to speak to a specialist employment law solicitor.As a general rule “out of court settlements” of employment disputes are not legally binding in that they cannot exclude employees’ rights to take the matters concerned to an Employment Tribunal. However, this is legitimately circumvented by entering into formal settlement agreements with the employees which fulfill certain legal requirements.

They involve an offer from an employer to an employee to agree to mutually terminate the employment relationship, usually to pay salary to a certain date, to pay part or all of the contractual notice period and often make an additional ex gratia payment as an incentive to the employee to sign. In return the employee will usually give up any right to make any claim or any future claim arising out of his employment against his employer (certain exclusions apply).

At Kew Law we have the experience in drafting settlement agreements. Contact us here for an initial discussion and to make an appointment or call our mobile friendly number on 033 33 22 1000 or 0800 987 8156 to speak to an Employment Law Solicitor.

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