A settlement agreement is a contract between two parties, usually (but not always) an employer and an employee, which settles the employee’s claims against their employer. The employee typically signs away their right to bring a claim in return for a payment.

If you are an employee, you are required to take independent legal advice on a settlement agreement before you agree to it. A settlement agreement is legally binding on the parties.

Two parties attempting to reach a reasonable settlement agreement in court

At what stage does a settlement agreement happen?

A settlement can be agreed at any point during proceedings. It is likely that an employee’s representatives may strive to reach a reasonable settlement agreement from the outset.

Because court and tribunal proceedings can be slow, unpredictable, and expensive, it is normally in everyone’s best interests to reach a reasonable agreement quickly. Sometimes the parties will reach a settlement agreement during the actual court or tribunal hearing.

What makes a reasonable settlement agreement?

This will depend on the nature and strength of the claim, and the unique circumstances of the case. Other relevant factors include:

  • how long an employee has been employed
  • the parties’ ability to pay or deal with proceedings
  • the risks involved with losing the case.

In many cases, it helps to know the basic awards to which an employee may be entitled.

For example, if a tribunal decides an employee has been unfairly dismissed, they can award compensation. This will be made up of:

  • a fixed sum calculated to a set formula: the basic award
  • compensation for the money lost because of the job loss: the compensatory award

The above is just an example. However, in those circumstances, it is possible to work out the approximate amount that could be ordered. This provides a starting point when working out how reasonable a settlement agreement may be.

A settlement agreement won’t necessarily be the same as the estimated court award – it could be more or less, depending on the strength of the case.

Legal representative calculating a reasonable settlement agreement award

The parties do not have to accept the first settlement offer. There is often some negotiation between the parties before an agreement is reached. There may also be other things to agree which are not tied to money.

What else should be in a reasonable settlement?

The contract should deal with several aspects in respect of the relationship between the parties. In particular, it should:

  • deal with all the claims
  • specify the date employment was terminated
  • set out the date or dates any payments are due
  • reference the tax position for the employee

In most cases, the first £30,000 of a settlement payment is tax-free.

The settlement agreement should also deal with any restrictive covenants or confidentiality agreements between the parties. The wording may go so far as to set out what the parties can or cannot say to the press about the case.

Provisions may also be included for the employer to provide a reference for the employee, and contribute towards the employee’s legal costs.

Finally, what happens if the employer does not comply with the payment terms of the agreement may also be set out.

This is not an exhaustive list, but it is a good starting point.

Person signing a binding settlement agreement document

What makes the agreement legally binding?

There are certain legal requirements with which a settlement agreement must comply.

  • The agreement must be in writing.
  • The agreement must relate to a particular complaint or proceedings.
  • The employee must have received advice from a relevant independent adviser.
  • The adviser must have a current contract of insurance or professional indemnity insurance and be identified in the agreement.
  • The agreement must state that these legal requirements have been met.

Both parties also need to sign the settlement agreement.

Obtaining professional advice about a settlement

Reaching a fair and reasonable settlement is not always straightforward. You will need to seek professional advice to evaluate an offer and advise you on how reasonable a proposal is.

As a legally binding agreement that will affect your rights and current situation, it is important to ensure you get things right.

At Springhouse, our team of experienced employment law solicitors retain the expertise and knowledge required to successfully navigate you through the process of agreeing a settlement.

If you would like to discuss the circumstances surrounding your claim and the potential for a settlement offer, get in touch with our helpful team today.

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Updates: For employers: Settlement agreements |

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