Settlement agreement legal advice

A settlement agreement (formerly known as a compromise agreement) is a legally binding agreement which ends an employee’s employment on legally binding terms agreed between the employer and the employee. The employee’s employment will terminate on an agreed date, and the employer will pay a severance payment in return for the employee’s agreement not to pursue any claims in a tribunal or a court. The employee must take independent legal advice on the terms of the settlement agreement.

No. Settlement agreements are completely voluntary and their terms must be agreed by both parties. Neither the employee nor the employer can be forced to enter into one of these agreements if they don’t wish to do so.

Terms negotiated through settlement agreements can often represent a better deal than what can be achieved through fighting the case at tribunal, not just because of certainty over the financial package, but also by securing terms which a tribunal can’t award, such as a reference wording or handover arrangements. Effective negotiation of settlement agreements can remove the need for you to bring formal proceedings against your employer, which can be a time-consuming and costly route to take.

There are a number of specific legal requirements that must be met in order for a settlement agreement to be valid. It must be in writing, relate to a particular complaint, identify the independent legal adviser, state that the independent adviser has given the employee advice and is covered by a contract of insurance, and state that the statutory provisions governing settlement agreements have been met.

When an employment has come to an end, either because of redundancy or a disagreement, a settlement agreement is used to agree the terms under which the employee will leave their job. Usually, the agreement involves the employee receiving financial compensation in return for agreeing not to take the employer to court. You can read more about settlement agreements in our blog here

From an employee’s perspective, it gives you the comfort of knowing that the matter is settled, and that your employer is legally obliged to pay you the settlement sum being offered. From an employer’s viewpoint, it gives them the comfort of knowing that their employee will not take any further legal action (whether potential or otherwise) in relation to any dispute.

There is no difference – they’re the same thing. The government renamed compromise agreements to settlement agreements at the end of July 2013. Sometimes people still use the old name.

In most cases, the employer will agree in the settlement agreement to contribute an amount towards your legal fees arising from having to obtain legal advice on the meaning and effect of the settlement agreement. This costs contribution is usually sufficient for us provide the required legal advice, meaning that you as the employee won’t have to pay anything towards our fees, assuming you are happy with the settlement amount being offered.

We invoice the employer directly for payment. If the employer’s contribution towards our fees (see above) is insufficient, we will advise you, the client, at the outset and make necessary arrangements. Sometimes we can agree an increase with the employer.

By signing a settlement agreement, you are effectively giving up the chance to make a claim against your employer, usually in exchange for a settlement payment.

As an employee, you must take independent legal advice on the terms and effect of your settlement agreement before it will be considered legally binding. Discover what type of settlements we can help you with here.

Generally speaking, any sums owed to you under your contract of employment, such as wages, holiday pay and bonus will be subject to tax in the normal way. Any redundancy payment, compensation for loss of employment or injury to feelings, or amount that can be treated as damages can be paid tax exempt up to £30,000.

The agreement only takes effect when you (the employee) have taken independent legal advice, signed the agreement, and we have issued a certificate to confirm the advice taken and returned this to the employer.

Normally you’ll be paid the settlement sum once the settlement agreement has taken effect (as above).