Settlement Agreements formerly known as compromise agreements are legally binding documents that set forth all of the terms on which an employment relationship will end. Upon termination of employment it can be utilised by an employer to ensure that the employee will not bring any legal claims against them. In return for giving up their right to bring a claim to an employment tribunal, the employee receives a set amount of compensation. These are important issues for most businesses and in the relevant circumstance employers are well advised to obtain qualified compromise agreement legal advice at the first opportunity following dismissal or anticipated dismissal.

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What does a settlement agreement consist of?

The precise content of the settlement agreement will depend on the circumstances surrounding the employment and the termination. Each arrangement is tailored to particular circumstances and it is essential from an employers perspective to obtain qualified legal advice on settlement agreements. For the most part, however, all settlement agreements cover the same key matters:

  • details about the amount of compensation the employee is to receive and related issues of taxation
  • full and final settlement of any claims which the employee has against the employer
  • any matters which are to remain confidential
  • any restrictions being placed on the employee’s future employment
  • the reference that will be provided to future prospective employers
  • assurances provided by the employee and employer

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What conditions must be met for a settlement agreement to be valid?

Validity from the perspective of an employer is paramount. Once the money has been paid the employer needs to know that they are safe from potential action in the Employment Tribunal. Qualified legal advice on a settlement agreement from a lawyer is essential. A settlement agreement is valid and enforceable if it:

  • is in writing
  • relates to a particular complaint held by the employee
  • is entered into only after the employee has received legal advice from an independent, qualified adviser who is covered by indemnity insurance
  • identifies the adviser
  • states that all of the requirements for a valid compromise agreement have been met

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What are the advantages of signing a settlement agreement?

Entering into a settlement agreement means that neither party will have to wait months for a costly and stressful Employment Tribunal claim to resolve the issues. With a settlement agreement both parties know with certainty the specific amount of compensation to be paid and received at an early stage.

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Is an employee required to sign the settlement agreement

An employee is never required to sign a settlement agreement. If an employee chooses not to sign it, then no agreement exists with regard to the termination of employment. Without signature the employee remains free to pursue a legal claim against the employer in an Employment Tribunal.

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How soon must payment be made

Normally the payment is made within one to two weeks after all of the parties have signed the agreement. The exact date of payment will be noted within the agreement.

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Is the compensation subject to taxation?

There is no charge to income tax for payments up to £30,000. However, any amount of compensation in excess of £30,000 will be taxed in the hands of the employee in the normal way, as though it was earned income.

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Does a solicitor have to be involved?

The law requires an employee to obtain legal advice before signing a settlement agreement. This is because the employee will be giving up certain legal rights in exchange for money and the deal must be seen to be fair to all parties.

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How much does it all cost?

In most cases the employer covers not only their own legal charges but also the expenses that the employee incurs while obtaining legal advice.

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UK Unfair Dismissal Solicitors Advice