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Settlement Agreement Advice in Exeter

Settlement agreements (formerly known as compromise agreements) are a way by which the employment relationship can be severed by a legally binding agreement between the employee and employer.

Although the specific provisions of a settlement agreement will vary on a case by case basis the general principle is that the employer agrees to pay the employee a sum of money, usually the contractual notice pay plus an ex gratia payment, in exchange the employee gives up their right to bring a claim against their employer in an employment tribunal, subject to a number of exceptions outlined below.

The requirements for a valid settlement agreement are that:

  • the agreement must be in writing and signed by both the parties
  • the agreement must relate to a particular complaint or particular proceedings
  • The agreement must state that the conditions regulating settlement agreements have been satisfied
  • the employee must receive independent legal advice as to the terms and effect of the settlement agreement
  • the advice must be provided by either a qualified lawyer or union official
  • The independent adviser must have a current contract of insurance (or professional indemnity insurance) covering the risk of a claim against them by the employee for the advice
  • The employee’s adviser must be identified within the settlement agreement and must sign the agreement to confirm the advice has been provided.

The cost of the employee’s legal advice is usually met by the employer under the terms of the settlement agreement.

On top of the settlement agreement containing provisions which provide that the employee will be compensated for their loss of employment in exchange for a waiver of any claims or potential claims an agreement will usually contain a re-assertion or modification of the employee’s restrictive covenants. The employee will usually be required to return all of the employer’s property by a specified date and provide an undertaking not to use any confidential information relating to the employer’s business or make any derogatory comments regarding the employer.

A purely compensatory payment may be tax free up to the amount of £30,000 however it is common for the employer to require the employee to indemnify the employer in relation to any tax or National Insurance Contributions that may be payable. An employee considering ending their employment by way of a settlement agreement may wish to obtain advice from a tax adviser.

Most claims can be waived under a settlement agreement including claims for unfair dismissal, whistleblowing, discrimination and equal pay. However there are a number of claims which are not capable of being waived under a settlement agreement including future personal injury claims (which have not yet arisen) and claims for failure to inform and consult in relation to collective redundancies or on a transfer of a business.

If you would like to discuss Settlement Agreements in more detail, please contact a member of the Employment Team