Employment settlement agreements

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What are they and how do they work?

A settlement agreement is a legally binding contract which waives an employee’s right to bring a claim, normally in exchange for payment. Settlement agreements can be used in many circumstances including:

  • Handling grievances;
  • Long term sickness;
  • Redundancy; and
  • Performance management at work.

A settlement agreement is often used to prevent taking a dispute to the employment tribunal which could be costly and have uncertain results. Severance arrangements must be recorded in writing and the employee must receive independent legal advice for the agreement to be legally binding.

A settlement agreement details an employee’s claims against an employer. It also contains agreed terms including when the employment will be terminated, how much compensation is offered, how the employee will serve their notice period and more.

An employer may need to use this agreement to settle claims in connection with:

  • A departing employee’s dismissal;
  • To settle claims that had arisen before they left employment; or
  • To agree terms on which an employee will leave employment and waive any associated claims.

If a departing employee signs a settlement agreement offered to them, and they are advised as required by ACAS, they cannot take out a claim with the employment tribunal against that employer.

It is common to agree on a form of reference for the departing employee. This helps to avoid future disputes and can be included with a settlement agreement.

In both the situations of an employer and employee it is always advisable to seek legal advice so as to make sure that both parties are protected and are able to agree to the best possible outcome in what can be a stressful time.

If you are an employer or an employee and need further legal advice on settlement agreements or any other areas of employment law please contact our employment team for further information on 01733 882800 or email: [email protected].

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