Chris Hadrill, a specialist employment solicitor at Redmans, explains what settlement agreements are and why employers offer them to employees.

Settlement agreements: what are they?

Settlement agreements are a type of contract that is used to settle actual or potential claims that employees may have against their employer arising out of their employment or the termination of their employment; they are also sometimes (in rare cases) used by employers to also settle potential claims that they could have against current or former employees.

Settlement agreements normally contain a reasonably standard set of obligations on the part of both the employer and the employee, as follows (please note that this is not an exhaustive list but details the most common types of obligation):

• An agreement as to how the employee’s notice period and outstanding holiday pay will be dealt with;
• The payment by the employer of an agreed amount of ex-gratia compensation for loss of employment to the employee (which can be tax-free up to a maximum of £30,000);
• The provision by the employer of an agreed form of reference; and
• In return, the employee’s agreement that they are agreeing not to pursue the employer for certain types of claim (normally any and all statutory, contractual and tortious claims, save for an excepted few)

Why do employers offer settlement agreements?

In my experience most settlement agreements are used by employers to settle potential claims for unfair dismissal by employees arising from the following types of situations:

• An ongoing or concluded redundancy process
• An ongoing or concluded performance improvement process
• Where there has been a breakdown in trust and confidence between the employer and the employee
• Where there have been allegations of misconduct made by an employer against an employee
• In settlement of an Employment Tribunal claim threatened or brought by an employee

There can be many reasons why employers offer settlement agreements to employees – some of these are detailed and explored below. Settlement agreements are often used in the following circumstances:

• As standard practice by the Human Resources team at an employer;
• To set out the terms of departure with certainty;
• To ensure a departing employee’s ongoing cooperation and assistance after they leave their employment;
• To settle threatened or issued Employment Tribunal claims

If you’re unsure as to the reason why you’ve been given a settlement agreement then you should seek legal advice on the terms of the agreement and discuss with your legal adviser why you think you’ve been offered the agreement – your legal adviser may be able to help you shed some light on why you’ve been offered the agreement (or make enquiries with your employer to find out). However, in the absence of specific information one way or the other I generally find that it is important not to speculate about the reasons why a client has been offered a settlement agreement, as this can distract from the task of advising on the terms.

Obtaining specialist legal advice on your settlement agreement

If you’ve been offered a settlement agreement by your employer then you should obtain specialist advice from a legal adviser, such as a specialist employment solicitor, on the terms and effect of the agreement – you should generally try to obtain advice as soon as possible as employers normally set a deadline for the completion of the agreement.