Settlement Agreements: What are they?

A settlement agreement (or compromise agreement as it used to be known) is a contract between an employee and employer, whereby the employee agrees to waive their entitlement to pursue particular claims in return for some form of consideration from the employer.  Where an employee will be leaving the business, the agreement usually also sets out the terms of the departure.  There are statutory conditions that must be met to ensure settlement agreements are valid and it is vital that settlement agreements are appropriately drafted.

What are the statutory conditions?

The agreement must be in writing, it must relate to a particular complaint or particular proceedings, the employee must obtain independent legal advice from an appropriate adviser (e.g. a solicitor) who has professional liability insurance in place to cover the advice, the agreement must identify the adviser and the agreement must state that the conditions regulating settlement agreements in the relevant legislation have been satisfied.

What claims and/or potential claims can be settled in a settlement agreement?

The majority of employment claims can be settled including, for example, unfair dismissal, discrimination, unlawful deduction from wages claims and breach of contract claims. However, there are some claims that cannot be settled by a settlement agreement including claims under the Agency Worker Regulations 2010 and claims for failure to inform and consult with appropriate representatives in a collective redundancy situation (however it is possible to settle the right to bring a claim for a protective award in this regard).  Further, it is not possible for the agreement to waive future claims or claims in respect of accrued pension rights.

Can the right to make an access request be waived in a settlement agreement?

Yes, a settlement agreement is a contract. Consequently, the parties can agree as part of the settlement terms that the employee will not make a subject access request in respect of his employment.

Does an employer have to offer something in exchange for the employee to enter into this agreement?

Yes, in line with normal contract principles, an employer will need to give consideration in return for the employee waiving their rights. Statutory redundancy payments and contractual payments such as holiday pay are not consideration as they will need to be paid anyway in accordance with the employment contract and statutory redundancy legislation. Consideration is normally an additional monetary sum. It can also be non-monetary for example an agreement that the employee may keep a company car.

What is taxable under a settlement agreement?

Contractual payments such as salary and notice (even if paid in lieu) will all be taxable as normal.  Termination payments up to £30,000 are tax free. A termination payment would include a redundancy payment and/or a loss of office payment.

Is a settlement agreement confidential?

Common terms of the settlement agreement would be that the terms of the agreement are strictly confidential, and that the employee can only discuss the agreement with their professional advisors and immediate family. However it is usually made clear that the employee can still make a protected disclosure, report a criminal offence or comply with legal requirements.

How we can help

Whether you are an employer preparing a settlement agreement or an employee considering an offer, our employment law specialists can provide practical, tailored advice. Get in touch today if you have any questions.