Negotiate with an employee from the outset and protect yourself from any future claims using this settlement agreement (previously known as a compromise agreement). A settlement agreement is a legally binding contract which waives an employee's right to bring a claim, normally in exchange for payment. Settlement agreements can be used in many circumstances including handling grievances, long term sickness, redundancy and performance management at work. Use this legally binding settlement agreement to prevent taking a dispute to the Employment Tribunal which could be costly and have uncertain results. Severance arrangements must be recorded in writing and the employee must receive independent legal advice for the agreement to be legally binding.
Overview of the Settlement agreement
When should I use a settlement agreement?
Use this settlement agreement:
- to settle claims that an employee has against their employer in connection with their dismissal
- to agree terms on which an employee will leave employment and waive any associated claims
- to settle claims that had arisen before an employee left employment
- only for employees based in England, Wales or Scotland
What's included in a settlement agreement?
This settlement agreement covers:
- termination of employment
- salary, benefits and expenses due up to termination
- payments of compensation for claims, notice period, bonus due and holiday pay
- taxation of termination payments
- tax indemnity from employee
- repayment of sums owed to the employer
- pension arrangements
- employee reference
- return of company property
- confidentiality and post termination restrictions
- waiver and settlement of claims
- requirement for independent legal advice
What's a settlement agreement?
A settlement agreement is a legally binding contract between an employer and employee which details an employee's claims against an employer. It also contains agreed terms including when the employment will be terminated, how much compensation is offered, how the employee will serve their notice period and more.
Do I need a settlement agreement?
An employer may need to use this agreement to settle claims in connection with: a departing employee's dismissal; to settle claims that had arisen before they left employment; or to agree terms on which an employee will leave employment and waive any associated claims.
If a departing employee signs a settlement agreement offered to them, and they are advised as required by ACAS, they cannot take out a claim with the Employment Tribunal against that employer.
You need this agreement to prevent your employee taking a claim to the Employment Tribunal, which can be costly and have uncertain results.
Can I attempt to commence a settlement agreement after an employee has started an Employment Tribunal claim against me?
Yes, you can commence a settlement agreement after your employee started a claim against at Employment Tribunal.
Can this settlement agreement be used if the employee is still employed?
Yes, you may want to agree with a departing employee the terms of this settlement agreement whilst they are still employed.
How should I work out the amount to offer as compensation?
The compensation amount should be a sum of any outstanding payments to compensate your employee's waiver to bring any kind of claim against you such as:
- failure to give due notice where the payment is not made in accordance to a PILON clause
- lost bonus where the payment is not contractually due
- payment for accrued holiday, i.e. unused holiday
- enhanced or statutory redundancy payment where applicable
- ex -gratia payment, i.e. incentive to sign a settlement agreement
- legal costs.
How long should I give the employee to sign the agreement?
You should give the employee between 14 and 21 days to sign and return the settlement agreement. This will allow enough time for them to obtain independent legal advice, as required by law to make the agreement valid. ACAS recommends ten days as a minimum amount of time.
Should a reference be included with a settlement agreement?
It is common to agree on a form of reference for the departing employee. This helps to avoid future disputes and can be included with a settlement agreement.
Further advice
- if you want to waive claims for an employee who will remain in employment
- for employees who spend some or all of their time working outside England, Wales or Scotland
This settlement agreement is governed by the law of England and Wales or the law of Scotland. In order for this agreement to be valid the employee must receive independent legal advice from a person who satisfies conditions set out by law. Most solicitors will meet the necessary criteria.