What is a Settlement Agreement?

A settlement agreement is a legally binding agreement used to conclude a dispute between an employer and an employee. They are generally used to agree the terms on which an employee’s employment will come to an end. There are strict rules about what a settlement agreement must contain, and the employee must take independent legal advice on the agreement before it can be entered into. This is to ensure that they fully understand their legal rights and the precise terms and effect of the agreement itself. The agreement usually contains a clause that the employer will pay for the employee to obtain the legal advice they need.

Why are settlement agreements used?

The main reason for settlement agreements is to allow the employer and employee to settle a dispute on terms they both find acceptable and without the risk, expense and uncertainty of employment tribunal proceedings. However, these agreements are often offered to employees when they should not be; or employees are offered too little.

It is vital that you understand your employment rights and exactly what you will be signing up to before you enter into any agreement. You need to consider the effect that the agreement might have on your future career, (for example, references from the employer in question), and discuss your concerns with your employer. Taking expert legal advice in such cases is essential.

How Macks can help:

At Macks we understand that the key to making the right decision is getting the right advice. We offer expert legal advice on settlement agreements and will ensure that you receive all the information you need to make an informed decision about your settlement agreement.

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Frequently Asked Questions
  • What is a settlement agreement?
  • A settlement agreement is a legally binding agreement between an employee and an employer which agrees to settle any claims the employee may have against the employer in return for an agreed payment.  To be a binding settlement agreement the employee must take independent legal advice on the agreement itself.  The cost of taking that advice is almost always paid by the employer.

  • In what circumstances are they offered?
  • Settlement agreements should be offered when there is a particular dispute between the employer and the employee.  Having said this they are now widely used in all kinds of situations where, for one reason or another, the employee’s employment is expected to come to an end.

  • Can I still bring an Employment Tribunal claim against my employer if I sign a settlement agreement?
  • The whole purpose of the settlement agreement is to prevent this from happening.  Whether or not you can still bring a claim depends on the precise wording of the settlement agreement itself and whether or not it has been used in the appropriate circumstances.  Having said this, you shouldn’t enter into a settlement agreement thinking that you might still be able to bring a claim later on.  You need to take detailed advice at the outset.

  • How will the payments be taxed?
  • Payments which constitute earnings from employment will be taxable in the usual way.  However, certain payments can be made tax free up to £30,000.  For example, a redundancy payment can be made without the deduction of tax and national insurance.  Your solicitor will be able to explain more to you.