Settlement Agreements – When And How To Use Them

They can be used in a variety of different situations, most commonly when employment is coming to an end. In this blog we look at when, and how, an employer should ask an employee to sign a settlement agreement.

Redundancy

The most common situation in which a settlement agreement is used is redundancy. This is when the employer no longer has a need for the employee’s role, or when the role is no longer needed in a particular location.

All employees with more than 2 years of service are entitled to a statutory redundancy payment, but if the employer is making additional payments, a settlement agreement will be used. This allows the additional payment (up to £30,000) to be paid without deductions for income tax and national insurance. In return, the employee agrees to waive their right to bring a claim against the employer.

Difficulties in the employment relationship

Sometimes, where a grievance has been raised or a disciplinary process started, the parties agree to end the employment relationship because that relationship has broken down. Using a settlement agreement in this situation ensures that any grievance or other complaint is brought to an end.

Ill health

If an employee is on long-term sick leave, an employer may choose to offer the employee a payment to bring their employment to an end. This can often be the best solution for both parties.

To settle Employment Tribunal proceedings

If the employee has issued a claim against the employer, and the parties then agree settlement terms, the agreement will be recorded in a specific type of settlement agreement known as a COT3. ACAS will facilitate the completion of the COT3 agreement.

How to use a settlement agreement

It is vital that any conversation with the employee is held as a “protected discussion”. This means that the settlement proposals and any discussions around them cannot be referred to in the Tribunal.

Once terms have been agreed, the employer should provide the employee with a draft settlement agreement. The employee must then take independent legal advice, and normally the employer will make a contribution towards their legal fees.

Once both parties have signed a settlement agreement, it becomes binding. A failure by either party to comply with the terms agreed will be a breach of contract.