Settlement / Compromise Agreements

Often employers offer Settlement Agreements to existing and former members of staff so as to buy off the risk of the employee suing the employer.

By entering into a Settlement Agreement, an individual is accepting a sum of money and in return giving a promise not to sue the employer. Once the agreement is signed, the employee cannot sue that employer - except in very limited circumstances e.g. to recover the money agreed to be paid under the agreement.

This process can often have greater consequences than first appear. For example, most agreements provide that if tax is payable on the settlement sum (which is determined by HMRC and not the employer) the employee is liable to pay all the tax including the employer's NI.

An employee needs to think very carefully as to whether or not the money offered represents a fair offer for signing away their rights. An employer needs to calculate their offer balanced against the consequences of the settlement not being accepted. It is vital specialist advice is taken to assess the value and likely success of the potential claim being settled.

Employers should consider carefully whether an post termination restrictions should be inserted into the agreement.  A worker should also think carefully about the consequences of being bound by such restrictions.  Common examples are:

  • A confidentiality clause restricting what can and cannot be said about the termination of employment
  • Restraint of trade clauses, which prevent an employee from working with a competitor or from setting up in competition with the employer

Be aware that such clauses can be more easily enforced when contained within a Settlement Agreement as opposed to within a contract of employment.

An individual is required to take legal advice for the agreement to be enforceable. These are important documents as they can be complex.  The signing of them should not and cannot be a mere formality. It is crucial that employers and employees are fully aware of the terms and implications the agreement.

Employment law clinic

We provide a free employment law clinic for employees between 14.00 and 17.00 every Monday. In the free 20 minute appointment we will be able to assess and provide a realistic appraisal of your claim.