What is a settlement agreement?

When an employment relationship comes to an end – particularly where this is due to a dispute – a settlement agreement (formerly called a compromise agreement) will sometimes be offered by the employer. This is essentially a legally binding contract between the employer and employee, under which the employee agrees to abandon any claims they might have against their former employer in exchange for a payment (usually 3 – 6 months’ salary). Some of the terms normally included in a settlement agreement are:

●    termination date
●    amount of termination payment
●    notice period, accrued holiday and payment in lieu
●    bonuses and stock options
●    waiver of claims – these should be specific and cannot include personal injury claims which are not yet known
●    job reference – this will often be attached to the agreement
●    reasonable restrictive covenants
●    legal fees for the independent legal advice pertaining to the agreement

Should I offer a settlement agreement?

This depends entirely upon the circumstances. Some larger employers routinely offer settlement agreements to their departing employees, but SMEs with limited funds will need to consider whether the cost of such an agreement is worth it. If there is a potential claim with reasonable chances of success, it is usually cheaper to draw up a settlement agreement rather than going to court.

How do I provide a settlement agreement?

You should always ensure that the specific circumstances of an employee’s departure are covered by a settlement agreement. The employment law team at CH Legal can draw up a bespoke agreement which takes account of these unique circumstances, as well as any particular requirements and characteristics of your business.

Note that an employee must receive independent legal advice before signing a settlement agreement in order for it to be legally valid.

To find out more about settlement agreements, get in touch with Caroline Tomlinson or call 0845 4786 354.