What is a settlement agreement?

Published on December 10, 2013 by Jon Curtis

What is a settlement agreement?

This week we asked Jon Curtis (employment law solicitor and partner at Ironmonger Curtis LLP) to give us a heads up on settlement agreements. We are pleased that he has shared his knowledge with us and hope you find it useful.

Unfortunately, it is sometimes the case that employers and employees fall out! When this results in a “parting of ways” which the law would deem unfair, it is sometimes possible to “do a deal” which results in settlement between the parties.

Settlement agreements are written documents which record the settlement of a dispute between an employer and an employee. Often, they are used when an employee leaves a job and the employer offers a cash payment in return for various promises from the employee.

What are the legal requirements?

A settlement agreement has to be in writing and it should settle a “particular complaint” (although in reality they are often used to settle “all and any” disputes between the parties.

The employee has to get advice from a solicitor who has to be independent from the employer.

Settlement agreements used to be called compromise agreements, but this changed in July 2013 where the name was changed – presumably to make it easier to understand what they are.

What terms commonly feature in a settlement agreement?

  • Firstly, the employee promises not to bring any claims, and secondly, the employer promises to pay some money!
  • Often the employee has to give a tax indemnity in relation to the money paid.
  • Often the employer will want confidentiality promises from the employee. Sometimes these agreement are referred to as “gagging clauses” in the press.
  • Generally speaking the employer will pay the employee’s fees.
  • Often the employer will provide a reference, and where the departing employee is a senior executive, sometimes a statement will be jointly agreed.

What is an “ex gratia payment?”

Ex gratia is Latin for “without obligation”.

Where there is a dispute between an employer and an employee, it is possible for the employer to make an “ex gratia” payment to the employee tax free up to £30k. Clearly, if the sum of money is required to be paid under the contract (for instance a golden handshake clause), the sum is not “ex gratia” and is rightly taxable.

Protected conversations

From the end of July 2013, it is possible for employers to undertake confidential discussions about the termination of employment. In other words, if an employer wants an employee to “move on”, the employer is able to make the employee an offer without fear of the employee using that offer against the employer in an employment tribunal.

Note that such conversations can only be undertaken in certain circumstances. For instance, the new rule will not protect the employer if there is a discriminatory element to the conversation.

Jon Curtis is an employment law solicitor with Ironmonger Curtis LLP. He has produced some guidance information on settlement agreements which can be found on Ironmonger Curtis' website.

Picture of Jon Curtis

Written by Jon Curtis

Jon Curtis is Managing Director at myhrtoolkit and previously an employment solicitor. He co-founded myhrtoolkit in 2005 and become full-time MD in 2018.

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