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How do settlement agreements work?

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Settlement agreements are an increasingly popular option for resolving employer-employee disputes, as well as heading off potential disputes during redundancy proceedings and other types of employee terminations. Settlement agreements act as a replacement for ‘compromise agreements’, which were formerly used for similar purposes.

A settlement agreement will usually involve an agreed one-off payment from an employer to an employee or former employee in exchange for the employee agreeing not to take legal action over a specific issue. This can allow disputes or potential disputes to be resolved quickly and cost-effectively, while allowing both parties to avoid the need for an Employment Tribunal and keep the matter private.

Making sure a settlement agreement is legally binding

For a settlement agreement to be legally binding, it has to meet certain conditions.

The agreement must:

  • Be in writing
  • Relate to a specific complaint or complaints i.e. it cannot simply require that employee not to take the employer to a tribunal for any reason, it must specify exactly what they agree not to go to a tribunal about
  • Be signed by the employee only after they have had independent advice. This can be from a lawyer or from a certified, authorised trade union member if they have appropriate insurance or professional indemnity cover
  • Identify the employee’s adviser
  • State the relevant statutory conditions that regulate the agreement

In addition, the employee should be allowed reasonable time to consider the agreement. The Acas (Advisory, Conciliation and Arbitration Service) Code of Practice suggests a reasonable amount of time is a minimum of 10 days.

Benefits of settlement agreements for employers

There are several reasons why employers can benefit from using a settlement agreement to resolve a dispute with an employee.

A settlement agreement can:

  • Allow the matter to be resolved quickly
  • Save the employer the legal costs associated with an Employment Tribunal
  • Let the employer repair the relationship with an employee they wish to continue employing
  • Keep the matter private, avoiding the potential for bad publicity

Benefits of settlement agreements for employees

A settlement agreement is also often in the best interest of the employee, for various reasons, including:

  • It allows the matter to be resolved quickly so you can move on
  • In gives you a guaranteed payout, rather than dealing with the uncertainty of how much, if anything, you might be awarded by an Employment Tribunal
  • It keeps your legal costs to a minimum
  • The payment will usually be tax-free, up to a value of £30,000 (depending on the circumstances)

Get expert advice on settlement agreements and all other areas of employment law

Bird & Co Solicitors is a long-established law firm supporting both employers and employees with all aspects of employment law, including settlement agreements. We work with clients all over England and Wales from our 3 offices in the East Midlands, offering a modern, friendly and highly practical approach to all areas of business law.

To speak to our expert employment lawyers about your legal needs, call us today on 01476 372048 or use our  automated booking service which is fast and easy to use.