Settlement Agreements – A Win-Win Method For Resolving Employment Disputes

Conflict, problem, dispute and mediator blocks

As the Furlough Scheme is beginning to wind down, many employers are being forced to take stock of their labour requirements.  Undertaking a rightsizing exercise, whereby you evaluate whether your current staff have the skills and talent required to ensure your business can achieve its short, medium, and long term goals can result in both redundancies and recruitment.  When it comes to avoiding redundancy-related disputes and/or resolving other types of employment quarrels, Settlement Agreements provide a win-win tool for everyone involved.

What is a Settlement Agreement?

A Settlement Agreement is a legally binding contract between you and your employee.  At a basic level, your employee will agree not to bring a claim against you in the Employment Tribunal in exchange for compensation which is normally financial but not exclusively so.

The advantages of a Settlement Agreement include:

  • You can relax knowing that your employee cannot bring a claim for unfair or constructive dismissal in the Employment Tribunal.
  • The agreement is confidential meaning your commercial reputation will be protected.
  • The process is quicker than making an employee redundant and you do not run the risk of non-compliance with redundancy laws resulting in the employee making a claim.

The confidentiality aspect of Settlement Agreements has attracted recent controversy as some employers were using Non-disclosure Agreements (NDAs) (attached to the Settlement Agreement) to prevent employers from complaining about sexual misconduct, discrimination, or racist abuse.  To protect your business in the long term, it is essential to discuss any NDA element of a Settlement Agreement with an experienced Employment Solicitor.

What are the legal requirements of a Settlement Agreement?

To be legally valid, a Settlement Agreement must:

  • be in writing
  • relate to a particular complaint or disciplinary proceedings
  • only be signed after the employee has received independent legal advice from a Solicitor who holds the required professional indemnity insurance
  • state that the conditions regulating Settlement Agreements under the relevant legislation have been satisfied

If all these factors are not included in a Settlement Agreement the Court is likely to declare it null and void.

In most cases it is the employer who proposes the Settlement Agreement; however, the employee can approach you and suggest it as a solution.


How do I calculate the financial component of a Settlement Agreement?

Part of the money paid to an employee under a Settlement Agreement relates to compensation for loss of employment.  It is designed to ensure they have adequate funds whilst they search for a new position.

Factors to consider when calculating a financial settlement offer include:

  • the employee’s current position and salary
  • how old the employee is (unfortunately older workers often find it more difficult to secure another position)
  • your industry sector and how easy it will be for your employee to find a new position at a similar level

A Settlement Agreement will be made up of the following (where applicable):

  • payments that are part of the employment contract
  • payment in place of notice
  • compensation for loss of employment
  • bonus payments     /     share schemes/     long-term incentive plans (LTIPs)
  • compensation for any confidentiality clauses and/or restraint of trade
  • all other statutory/contractual claims 

Can a Settlement Agreement include non-monetary compensation?

Your offer can include non-financial benefits such as:

  • the continued use of a company vehicle
  • the employee’s laptop and/or mobile phone
  • health and life insurance
  • a gym membership
  • access to a career coach
  • a positive reference for future employers

Do not discount the value of non-financial benefits.  If your employee is considering becoming self-employed or re-training, things such as a career coach or a laptop may be highly appreciated.

Is tax payable on the financial component of a Settlement Agreement?

Tax and National Insurance is owed on the monies paid that the employee would normally receive under their employment contract if they resigned or were dismissed from their position, for example, holiday pay.  However, the first £30,000 of the compensation component of a Settlement Agreement is tax-free.

Final words

A Settlement Agreement helps mitigate some of the stress associated with making employees redundant or settling employment disputes.  Although the initial compensation payment and non-financial benefits provided under the agreement may seem expensive, your financial outlay is likely to be significantly less than it would be if you had to fight a claim in the Employment Tribunal.

If you require advice on Settlement Agreements or any other employment matters, please call us on 02476 231000 or email