Settlement Agreements

What is a settlement agreement?

A settlement agreement is a legally binding document setting out the terms and conditions agreed by two or more parties to resolve a dispute. It may include waivers of a party's rights to make further claims against the other party, usually by agreeing to accept a certain amount of compensation.

Is a settlement agreement a contract?

Yes, it is a legally binding contract between two parties unless a settlement agreement is found to have an element of:
(i) fraud;
(ii) duress;
(iii) illegality;
(iv) mistake; or
(v) undue influence.

Does a settlement agreement need to be notarised?

There is no legal requirement that a settlement agreement be notarised. However, a notarised agreement would have greater weight in court should the authenticity of the document or signature of a person be disputed.

What are the usual terms of a settlement agreement?

A settlement agreement is a contract agreed by an employer and employee at the end of the employer’s time of employment, often in a termination case. It is a legally binding document and stops the employee from bringing any future claim against the employer in respect of the termination.

The agreement will include the reason for termination, which can be mutual agreement, the date of termination, compensation details, an indemnity whereby the employee agrees to be responsible for any tax on the payment, amount of payments owed for work, in lieu of holiday etc, entitlement to any other benefits, an agreed form of job reference and a confidentiality clause.

What are ex gratia payments in settlement agreements?

An ex gratia payment is one that is owed morally rather than legally. It is paid by the employer to an employee who has for example been wrongfully treated or who is being made redundant. It will not include payments which are owed under the terms of the employment contract, although it may include payment in lieu of notice.

The amount of the ex gratia payment is negotiated between the parties. If the employee is likely to have a good case for unfair dismissal then they are in a strong position to negotiate a higher settlement. The sum agreed would in that case be a pay-off to avoid protracted arguments and a tribunal hearing.

Will I be taxed on settlement agreement payments?

In a settlement agreement no tax or National Insurance deductions will be made on ex gratia payments of up to £30,000. This is the government’s way of encouraging early out of court settlements. The recipient will notify HMRC of the ex gratia payment in their tax return. Statutory redundancy payments are also paid free of tax.

What should I do after I have received a verbal settlement offer?

If an employee receives a verbal settlement offer which they feel may be acceptable, it should be requested in writing together with all other conditions of the agreement. It is advisable to seek advice from a lawyer at this stage to ensure that all matters have been covered and that the agreement is fair and clearly drafted.

The employee is likely to be asked to agree to a number of restrictive covenants protecting the employer’s position, for example with regard to confidentiality, poaching clients, working for a competitor and not pursuing any further claims. The agreement should also allow for a contribution towards the employee’s legal costs and the employer’s agreement not to badmouth the employee.

Do I have to pay for a lawyer to help me negotiate a settlement agreement?

It is a legal requirement that an employee take independent legal advice before signing a settlement agreement. In particular this will include advice about the effect of the agreement on any future tribunal claim they may wish to make. The advisor will be named in the agreement and must carry valid indemnity insurance.

It is strongly recommended that an employee also obtain the services of a lawyer with regard to the negotiation of a settlement offer. This will ensure that the employee’s position is protected as far as possible and that they clearly understand all clauses, for example the extent of any binding restrictions.

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