Your employer has just mentioned the words ‘Settlement agreement’ to you. What does it mean? How will it affect you?
A settlement agreement is legally binding contract made between an employer and employee either towards the end or just after leaving employment and brings your employment to an end. It usually provides a severance payment for the employee who in return promises not to pursue any grievance in the future in an employment tribunal. They are also known as Gagging Clauses, Compromise Agreements, Ex-gratia Payments, Golden Goodbyes or Termination Agreements. The proper legal term however is ‘Settlement Agreement’.
What is a Settlement Agreement for?
The main reason for a Settlement Agreement is to create a clean and amicable break for the employer and employee at the end of the employment, whether or not there is a disagreement.
There will be agreements on the reference for the employee going forward and clauses included which ensure that the employee is not undermined in the future. It will also usually involve a tax efficient payment. The employee waives their ability to take the employer to an employment tribunal in the future. The employee normally has three months once they have left employment to take the employer to tribunal, if there is a settlement agreement they will not be able to use the tribunal avenue.
It is very important that the employee takes legal advice on the agreement so that they are not disadvantaged in the future. Indeed, if the settlement agreement is to be valid in law the employee must take independent legal advice and the employer has a duty to pay for that advice. The solicitor for the employee has to attach a certificate to the agreement stating that advice has been given.
Should you be worried about signing away your rights in this way?
As long as an agreement is checked by your lawyer who is working on your behalf, it can be a good system. The lawyer will check the payment to be made and when it will be made and make sure that the first £30,000 is free from deductions. Indeed, the lawyer might also suggest that the payment is increased. You will also be able to agree the reference and terms of leaving, especially if you are leaving in bad circumstances.
It could also be that your lawyer suggests that a settlement agreement be drawn up in the first place. Many employers would be open to this suggestion as ultimately it is much more costly to go down the employment tribunal route.
If you want advice on Settlement Agreements then please get in touch.
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