24 April 2023

What is a settlement agreement?

By James Eden, Solicitor, Hayes + Storr.

A settlement agreement is a legally binding contract between an employer and an employee. Settlement agreements are sometimes offered to employees as a way of bringing the employee’s employment to an end. They are voluntary and there is no obligation for employees to sign the agreement or agree to a settlement.

It is usual for any offer of a settlement agreement to be made in a ‘protected conversation’ meeting which means that it is without prejudice and cannot be referred to in any subsequent court or tribunal proceedings.

There are a range of situations when a settlement agreement may be offered; from trying to resolve a particular issue and preventing a genuine claim to simply bringing a period of employment to an end by mutual agreement.

Settlement agreements usually include a payment by way of compensation for loss of the employee’s job. A compensation payment of up to £30,000 can be paid without tax deducted as long as it’s entirely ex-gratia, meaning that it is compensatory and does not include any contractual payments.

In order for any settlement agreement to be affective and binding, the employee needs to obtain independent legal advice on the effects of the agreement and its terms. The cost of obtaining this legal advice is usually paid for by the employer.

For more information, or if you have been provided with a settlement agreement and would like to discuss it, contact James Eden on 01328 863231 or email james.eden@hayes-storr.com.

This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.