Settling Your Differences

With the current economic uncertainty, the number of Settlement Agreements (previously Compromise Agreements) being offered to employees has greatly increased.  They are typically used in redundancy situations. It is a document that many of us have heard of but what is it and what does it do?

In essence, it is a legally binding contract, usually offered shortly before or after the termination of employment which once signed by both the employer and employee means that the employee is unable to take the employer to an employment tribunal or issue any other employment-related proceedings in return for an agreed sum of compensation

The benefit to the employer is obvious.  They in effect have an insurance policy that they will not be sued and avoid costly litigation but what are the advantages to the employee?

Clearly the employee should benefit financially if they are signing away their legal rights but sometimes wily employers will dress up an agreement to look as if the employee is being given a massive benefit when they are simply being given what they are already entitled to.  The list below highlights some of the main points to consider.

  • The first £30,000 of any lump sum payment is usually tax free, this is at the discretion of HMRC and not an absolute right. As a result of the employee will have to indemnify the employer should HMRC claim payment of any tax.
  • Any payment in lieu of notice is subject to income tax and national insurance contributions and should always be in addition to any lump sum payment. If you are not working your notice you are normally entitled to payment for it.  It is rarely a good reason to sign away your employment law rights.  ,
  • You need to be completely certain you do not have an employment law claim worth more than the agreement. Once signed you will not be able to make an employment claim against your employer.
  • Generally, costs at the Employment Tribunal are not recoverable. It can be worth taking less than you would receive at an employment tribunal to have the certainty of cash in your pocket and avoid the  expensive, lengthy and stressful legal proceedings. It will bring a degree of closure to what may well have been a difficult chapter of your life.
  • The employer must pay a contribution to the cost of the legal advice. Settlement Agreements can vary in complexity. If there are substantial negotiations on the sums and terms, the cost may be more than what an employer will offer to pay. It is sometimes worthwhile funding the additional legal fees yourself in order to secure a better deal.
  • A settlement agreement must be signed by a solicitor, fully qualified legal executive or union rep to be binding. Settlement Agreements are not legally effective unless the employee has received independent legal advice about it.
  • Be careful the agreement does not extend any restrictive covenants in your contract of employment.

If you are  being offered a Settlement Agreement and want expert advice on the full effect and meaning of the terms and to ensure you are securing a good deal for yourself and your future then please contact our experienced Employment Solicitor, Alex Lyttle, on 01452 222340 or who will be happy to help you.

To contact us please call 0800 158 4147 or 03330 145451 or email

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