The purpose of Settlement Agreements

This article provides an overview on the nature and effect of a Settlement Agreement when terminating employment. 

The purpose of a Settlement Agreement is to legally terminate an employment contract whilst settling or waiving the employee’s disputes and future claims.

Either the employer or employee can offer a Settlement Agreement to terminate the employment contract in a mutually acceptable way. However, generally Settlement Agreements are offered to the employee by their employer.

There are a number of reasons as to why employers offer a Settlement Agreement. These may include avoiding internal disciplinary procedures, capability procedures, or the statutory redundancy process. Alternatively they may wish to settle a claim by the employee without going through potentially lengthy and costly Tribunal proceedings.

The Agreement’s terms are mutually agreed and employees must obtain independent legal advice prior to signing the Agreement.  Legal advice is required for the Agreement to be enforceable upon the employee.  As the employee is waiving their right to bring an employment claim upon entering into the Agreement, they must obtain advice upon the merits of a potential claim and how the Agreement prohibits them from pursuing such a claim. 

As the employee is required to obtain legal advice before the Agreement can be enforceable, employers usually contribute towards the employee’s legal fees. In the event the employer’s contribution does not fully cover the employee’s legal fees it is likely the employee will have to pay the balance between the contribution and total fees.

Settlement Agreements are useful to provide reassurance to the employer that the employee will not bring a claim against them especially in circumstances where a statutory procedure has not been followed. Usually a termination payment is offered to the employee in exchange for this.

If the employee has a potential claim their legal adviser should advise them as to the level of compensation they may be awarded if they took the claim to Tribunal and consider whether any termination payment awarded in the Agreement is sufficient to compensate the employee for waiving their right to pursue the claim.

If you are considering entering into a Settlement Agreement and would like to discuss this in more detail, please do not hesitate to contact Natalie Peacock on 01603 625231 or by email nlpeacock@cozens-hardy.com.