Settlement Agreements – why am I being asked to sign one?

03 August 2020

Settlement Agreements formerly known as Compromise Agreements are widely used legal contracts made between an employee and employer, generally towards the end of the employee’s employment. Both parties will attempt to reach an agreement which formally agrees the leaving terms between them and prohibits the employee from bringing employment claims against the employer in respect of the employment and/or its termination, for which the employee generally receives a lump sum payment.

So why would you want a Settlement Agreement? As an employee the agreement will make clear what payments you are receiving including, for example, any holiday pay that might be outstanding, any remaining salary and any lump-sum payments. On some occasions, your employer may also provide you with an agreed reference and will also pay your legal fees to take advice in relation to the agreement.

As an employer, whilst setting up the agreement and ensuring the employee takes legal advice may cost you, it pales in comparison to the cost of an employee taking you to the Tribunal. The main benefit therefore for an employer is the certainty that once the Agreement is signed the employee will not be able to bring an employment claim. Most employers, despite following fair procedures or even when the employment terminates amicably prefer to use Settlement Agreements for certainty.

An employer can potentially look to offer a Settlement Agreement at any point. On most occasions, an employee will offer the agreement to avoid long drawn out issues such as disciplinary, redundancies which can often take time and be costly or to bring an end to a dispute with an employee. However just because a Settlement Agreement has been offered does not mean that an employer considers that they have done something wrong or that they are at risk of a claim.

As an employee, just because you are offered a Settlement Agreement, does not mean you have to accept it. Your employer will be required to ensure that you take independent legal advice and will, on most occasions, pay for you to do so.