A settlement agreement is a legally binding contract between an employer and employee which settles claims that the employee may have against their employer.
Settlement agreements are typically given to employees if they are being made redundant or are given money in return for certain conditions, such as not bringing a claim against their employer. Ideally, problems get resolved through talking or formal procedures but when an agreement still cannot be reached a settlement agreement can be used to end the relationship between employer and employee. They can also be used to settle disputes mid-contract.
Many settlement agreements may also include a reference for the employee, a reference could help the employee find a new job faster, reducing the stress and financial impact of their departure from a company.
An employer should give an employee enough time to consider a settlement agreement, usually a minimum of ten calendar days. An employer should be clear about the reasons behind the proposal and be prepared to meet and answer any questions from the employee. An employer should be sensitive about issues discussed with the employee with the main aim of reaching a mutual agreement.
When deciding on how much money to offer for a settlement agreement an employer should consider the potential cost of resolving the issue without a settlement agreement.
The tax rules on a settlement agreement are complex and should be checked by an accountant or financial advisor, generally, compensation paid under a settlement agreement can often be made free of tax and national insurance up to the value of £30,000.