Employee Settlement Agreements

A settlement agreement (formerly known as a compromise agreement) is a voluntary, written agreement under which you agree to waive your right to pursue any claim (as specified in the settlement agreement) against your employer. You may be offered a settlement agreement at any time during your employment, as the agreement may be proposed to settle a dispute or to end employment on agreed terms. It will usually be the employer who proposes a settlement agreement; however, an employee is also entitled to request one. 

Your employer will generally offer you a lump sum (known as an ex gratia payment) for waiving your rights to make a claim. This sum is usually provided in addition to any pay that you are entitled for untaken holidays, or notice pay (if your employer does not want you to work your notice they have to pay your notice period). 

Employee settlement agreements are entirely separate from redundancy settlements.  A redundancy situation occurs if there is a reduced need for the organisation to carry out a type of work or if there is a workplace or organisation closure.  A settlement agreement is not tied into these situations; it may be offered to any employee at any time.  However, the result of both agreements is that you will be provided with a lump sum following the termination of your employment.

The crux of the employee settlement agreement is that you promise – referred to as ‘warrant’ –  that you will not bring any of the claims that are listed in the agreement against your employer. You will typically be asked to waive every possible claim that you could have brought. However, personal injury claims that you are not aware of at the time of signing the agreement or latent claims that have not yet arisen can usually still be pursued, in addition to your right to enforce the settlement agreement.

If you have decided to sign the settlement agreement then you have waived your rights to bring a claim. The  Employee settlement agreements are legally binding agreements; so, under employment legislation, you will be liable for breach of contract if you pursue a claim after the agreement is signed.

A protected conversation is a privileged discussion between an employer and employee about the termination of the employment relationship. Protected conversations are confidential and cannot be relied upon by employees for the purposes of bringing an ordinary unfair dismissal claim. However, if the conversation evidences discrimination or an automatically unfair reason for dismissal, such as whistleblowing, then the employee can rely on the conversation in the Employment Tribunal. 

Yes. A settlement agreement can only be signed after you, as the employee, have received independent legal advice, such as from our Employment Law Solicitors.  Due to the significance of waiving your right to bring a claim, you need to be advised of whether you have any possible claim against your employer and the value of that claim. The independent advisor will explain all the terms of the agreement before you sign it to ensure that you fully understand its effect under employment laws.

As the employee, you must seek independent legal advice before you can sign the agreement. Most employers will offer a contribution towards the cost of you obtaining legal advice. Assuming that the agreement is straightforward, the employer’s contribution may cover all of your associated legal costs.

Payments of less than £30,000 can be paid free of tax and National Insurance.  The settlement agreement should state whether the payment is subject to tax.