Settlement Agreements: How to Make a Clean Break

  1. What is a Settlement Agreement’?

In the UK a Settlement Agreement is a legally binding agreement to put an end to a dispute. In employment law, it is typically used to bring an employment relationship to an end with a clean break for both parties, allowing all concerned to walk away without fear of employment tribunal claims.

  1. When Can They be Used?

Settlement Agreements are often used alongside Protected Conversations. Settlement Agreements are voluntary and can be offered at any stage of an employment relationship; they are not dictated by length of service or type of employment contract. However, in most cases the usefulness of a Settlement Agreement is greater in situations involving employees with two years’ service or more, as such employees have the right not to be unfairly dismissed.

  1. What’s the Deal?

In a typical Settlement Agreement, the employee is paid a sum of money in exchange for signing away claims against the employer. Although the list of claims which are commonly compromised by the employee is a long one, it will generally include the following claims:

    • Unfair dismissal (this covers a wide range of claims);
    • Breach of contract;
    • Breach of the Working Time Regulations, such as the right to paid holidays; and
    • Unlawful discrimination.


    1. A Legally Binding Document

    For the Settlement Agreement to be legally binding certain requirements must be met:

    • The agreement must be in writing;
    • The agreement must relate to a particular complaint or specific proceedings;
    • The employee must have received independent legal advice on the agreement, specifically, on its terms and the effect of the Agreement on their ability to pursue the claims referred to in it;
    • The adviser must be identified in the agreement;
    • The adviser must have insurance in relation to the advice (and, although they do not have to be a solicitor, they usually are); and
    • The agreement must state that the conditions regulating Settlement Agreements in the relevant legislation have been met.

    It is important that both employer and employee understand what they are proposing and/or agreeing to. Even if the employee feels they understand what is being proposed, it is a legal requirement that they receive independent legal advice. Without it, the agreement will not be binding. In such cases, the employee will still be able to pursue claims against the employer for unfair dismissal, holiday pay and so on, through the employment tribunal process.

    In terms of how a Settlement Agreement is structured, employers will generally seek a rational basis for calculating a potential financial package, for example, statutory redundancy pay (or an enhanced version of it) together with pay in lieu of notice (PILON).  They should also factor in a contribution towards legal costs (usually around £350 plus vat) for the employee given the stipulation that they must obtain independent advice on the terms and effect of the document before signing it.

    1. In Summary

    If used correctly, a Settlement Agreement may be a less painful route to resolution for both the employee and the employer. Therefore, alongside Protected Conversations, it is an option well worth considering when contemplating bringing an individual’s employment to an end.

    Get in touch with our international employment law team if we can be of any assistance.

    This orientation does not and cannot replace legal advice. Rooney Nimmo does not accept any liability for any loss arising out of or in connection with this orientation, in contract, delict, tort, by statute or otherwise.

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