What Are Settlement Agreements?

A 'settlement agreement' is a legally binding agreement in relation to the termination of employment. Normally, the Employer will give the employee a severance payment, in return for the employee agreeing not to pursue any claim they believe they may have to an employment tribunal.

It is becoming more common place to have a settlement agreement in place even if there are not any contentious issues. Businesses would rather protect themselves than face an expensive legal challenge at the Employment Tribunal.

In order for a settlement agreement to be binding, the employee must consult with an independent Solicitor to understand the implications of signing a settlement agreement. The Solicitor will also be required to sign off an adviser's schedule, usually on letter headed paper. This is attached to the agreement.

The Employer, ninety five per cent of the time should pay for the employee's legal fees for consulting with a Solicitor. This can range from between £250 plus vat to £1000 plus vat.

The Employee may also need advice on whether or not an ex-gratia payment will be taxable. The Solicitor should be able to advise the employee on the basic tax implications however, if detailed information is required, the employee should contact payroll or HMRC.