What is a settlement agreement?

Previously known as a compromise agreement, a settlement agreement is a legally binding contract that is made between an employee and their employer, which is drawn up usually drawn up when an employee’s time at the company is coming to an end, or just after they have ceased to be employed by that particular company or business.

The settlement agreement sets out in writing all the terms of departure between the employee and the employer. Once the settlement agreement has been signed, the employee cannot take legal action against their employer regarding their employment or its termination. An employee will usually sign this agreement in exchange for a termination payment as well as any number of other benefits which are set out in writing within the agreement.

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Entering a settlement agreement

There is one main benefit to entering a settlement agreement, namely that both parties will have certainty as to the terms of termination which will ensure a quick and amicable break with an employer and their employee. Any payments will usually be tax efficient and an employee may also receive a job reference as well as the written assurance that their employer will not say anything bad about them. For employers, a settlement agreement will safeguard against an employee making a legal claim against them in the future.

A settlement agreement will only become legally binding once the employee has received independent legal advice from a qualified solicitor.  The solicitors will also have to attach a document stating that they have provided the employee with the appropriate legal advice. Once a settlement agreement has been finalised and signed, this is final in the same way as if an employment tribunal has made an order at a full hearing.

A settlement agreement is often used regarding the following issues:

  • Redundancies
  • Performance Management
  • Long Term Sickness Issues
  • Clash Of Personalities
  • Transfer Of Business
  • Settling Grievances

Tribunal claims can be extremely costly and the outcome can be uncertain. With this is mind a settlement agreement is often the best way to ensure a positive outcome for both parties as it encourages an easy transition and amicable resolution that benefits both sides.

If you wish to sign a settlement agreement or wish to create a settlement agreement, it’s vital that you seek independent legal advice from a team of solicitors with your best interests at heart and a team that can ensure your rights are protected.

Here at Stephensons, we have many years of experience in dealing with settlement agreements and have the legal expertise you need to ensure a positive outcome. For more information, contact us today on 0203 816 9302​ or complete our online enquiry form.

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