What is a Settlement Agreement?

What is a Settlement Agreement?
A settlement agreement is a legally binding contract between an employer and an employee which brings the employee’s employment to an end. In essence, the employer terminates the employee’s employment in return for paying the employee a sum of money.
What sum of money should the employee receive?
The amount of money paid to an employee under a settlement agreement is discretionary. However, primarily, the employee will be entitled to payment of their notice pay and redundancy payment (which is dependent upon the employee’s age and the number of years which they have worked at the company). However, depending upon whether the employee has worked at the company for longer than 2 years, and dependent upon the circumstances of the end of the employee’s employment, they will be entitled to a further payment. As to the exact amount, the employee and employer will need to take advice from an employment law specialist. Relevant factors will include:

  • The seniority of the employee;
  • The validity or complexity of any claims;
  • The circumstances of the departure, whether it is on good terms or otherwise.
Can the employee still pursue a claim against the employer after signing the settlement agreement?
In order for the settlement agreement to be legal binding the employee must take independent legal advice. However, once this done the employee can no longer pursue a claim against the employer, save for any which have been exempted (usually in relation to pensions or an injury/illness of which the employee may not be aware).
Is an employee compelled to accept a settlement agreement?
There is no obligation upon an employee to accept a settlement agreement once it is proposed to them. However, there will almost always be circumstances which have led to a settlement agreement being offered – such as a breakdown in the relationship, a redundancy situation or pending disciplinary proceedings.
What happens to bonus payments?
The employee will need to be aware that if their termination date arrives before the date for payment of a bonus then they shall not be entitled to payment of the bonus. Therefore, either the termination date shall need to be amended to occur after the date of the bonus payment, or payment of the pending bonus made as part of the terms of the settlement agreement.
Is the Termination Payment tax free?
Yes, the termination payment is tax free up to a limit of £30,000.00 pursuant to the Income Tax (Earnings and Pensions Act) 2003. However, notice and salary payments under the settlement agreement shall be taxed in the usual way.
For more information please contact Sean McHale on 0113 247 3800 or by emailing sean.mchale@legalstudio.co.uk

Posted By: Sean McHale
Posted: 04 March 2022
2022 34 04 383 What is a Settlement Agreement?