Compromise Agreements have been around for many years and have often been utilised by employers to bring an end to a contract of employment. In July 2013 Compromise Agreements became known as Settlement Agreements, and whilst some changes were made (for example, a Settlement Agreement does not necessarily have to state that it is made in settlement of a dispute, whilst this was an essential feature of Compromise Agreements) the same principles generally apply.
The law states that an individual cannot contract out of his employment rights, but there is an exception to this rule where a settlement is reached by way of a Settlement Agreement.
A Settlement Agreement is a legally binding agreement between an employer and an employee used to set out the terms and conditions reached when a contract of employment is to be terminated or a dispute is to be resolved. It is essential that you fully understand both your rights as an employer and those of your employees before entering into such an Agreement.
Settlement Agreements can be used in a number of circumstances, including redundancy, dismissal, or the settlement of an Employment Tribunal claim. Perhaps the most common use is in redundancy situations where it minimises the risk of complications, prevents the possibility of future complaints arising, and concludes the employment contract unequivocally with agreement by both parties. However, it can also be a useful alternative to entering into a Performance evaluation and/ or disciplinary proceedings. The offer of a Settlement Agreement as a “tax free” alternative will often be a more attractive proposition for the employee, saving time, effort and costs all round.
The main reason for you to enter into a Settlement Agreement is that it will provide you with complete peace of mind, and remove the risk of a future (potentially costly) Tribunal claim from your employee. In redundancy situations, you are free to include reasonable terms for restricting the future employment of the employee, e.g. if working for a competitor could be adverse to your business’ interests. In addition it can help you speed up the process substantially, avoiding the necessity of having to consult, and having unhappy employees hanging around for longer than is necessary. Finally you can utilise the government’s tax free concession to promote the process.
If you have an employment law query relating to a Settlement Agreement or otherwise, our specialist employment lawyers have substantial experience working alongside businesses to resolve potential disputes with employees and can assist with procedures, preparing documentation and with negotiation.