Settlement agreements, previously known as compromise agreements, are legally binding contracts that waive an employee’s right to make a claim covered by the agreement to an employment tribunal or court. They invariably involve a payment to the employee in full and final settlement and are used extensively for senior level exits from a business but can be used for all employees.
They can be the most cost effective and time saving way to end an employment relationship. Both the employer and employee will sign the settlement agreement. It will set out terms mutually agreed by both parties which terminates the employment contract.
Usually, the settlement agreement benefits both the employer and employee. The employer can terminate the contract without the worry of a claim after termination and the employee will receive a payout and invariably, an agreed reference for future employment.
The typical terms in a settlement agreement are:
- Agreed termination payment incorporating compensation, salary, bonus, commission and holiday pay.
- A confidentiality, non-disclosure or non-derogatory clause.
- An agreed employee reference.
- Possible agreement of payment toward legal fees.
The following points explain how AB HR Solutions can support with all aspects of settlement agreements including:
- Drafting settlement agreements.
- Brokering financial settlement and facilitating discussions between the parties.
- Agreeing acceptable “forms of words” to cover employee references and to announce departure from the business.
- Negotiating terms between the parties and acting as a “go between”.
- Advising on how to protect the business from future risk.
Settlement agreements protect the employer and the employee will be required to take legal advice on the terms of the agreement. Hence in some situations where the exit is acrimonious, it is sensible for the process to be managed independently through a third party. Finally, a settlement agreement must always be signed by a solicitor or an approved trade union representative.
