Home » What is a Settlement Agreement and What Should I Have in My Settlement Agreement?

What is a Settlement Agreement and What Should I Have in My Settlement Agreement?

October 27, 2014,
Navya Shekhar,

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What is the most cost-effective, time-saving and trouble-free method to end an employment relationship?

Often, the cheapest, most time saving and suitable method to end an employment relationship is through a settlement agreement. A settlement agreement is a contract signed between the employer and employee that set out the terms mutually agreed by both parties for terminating the employment contract. By signing the settlement agreement the employee gives assurance to the employer that he or she will not make a claim against the employer in the employment tribunal after the termination of the contract. In return the employee usually gets a sum of money from the employer. There can be other terms and conditions that may be included in the settlement agreement, provided they are mutually agreed by both parties.

Is the settlement agreement a benefit for the employer or to the employee?

Usually the settlement agreement benefits both the employer and employee. The employer may face a number of problems after entering into an employment contract with the employee. These problems can include poor performance of the employee, inefficiency, inappropriate behaviour, temperament clash etc. The key advantage to the employer is to get rid of an employee with the assurance that the employee will not make a claim in the employment tribunal after the termination of the contract of employment. Similarly, the employee gets the benefit of an agreed reference from the employer which will enable him or her to look for a potential employer. Therefore the employee will not have to go through the trouble and expense of lodging a claim against the employer in the employment tribunal.

What should the settlement agreement contain?

The standard terms of the settlement agreement are the following:

  • The outstanding balance of the salary, bonuses, commission and holiday pay of the employee;
  • A termination payment that will be paid by the employer to the employee for agreeing to terminate the contract. Generally if the employee is a ‘bad employee’, as mentioned above, then he or she is at a weaker bargaining position and will not be able to demand a high sum of compensation. However if there is no fault of the employee and he has provided satisfactory employment services, then he or she can negotiate a higher sum of compensation for terminating the employment contract.
  • Generally, the first £30,000 (not including payment in lieu of notice if such a clause exists in the contract) of the compensation payment is tax-free;
  • A Confidentiality or Non-Disclosure clause may be included which is usually of benefit to both parties;
  • A non-derogatory clause may be incorporated in order to prevent both parties from saying unpleasant things about each other.
  • The employee will usually waive most rights that he or she may have against the employer.
  • Typically the employee demands a ‘good reference’ which is often useful when applying for a new job. This is more difficult to obtain if the employee was regarded as poor performer.
  • A contribution by the employer towards the legal fees.
  • A settlement agreement must be signed by a solicitor, trade union official or someone from the Citizens Advice Bureau.

At Truth Legal we have expertise in advising on settlement agreements and we look forward to hearing from you.



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