A Settlement Agreement (sometimes called Compromise Agreement) is an agreement between an employee and an employer regarding the termination of employment.
It will contain essential terms such as; date of termination, outstanding holidays, notice and any compensatory payments.
They are used in several circumstances but essentially happen when the employee and employer agree that employment will come to an end without having to go through a process.
Settlement Agreements often come off the back of workplace processes such as; redundancy, disciplinary, grievance, capability.
Mostly it is the employer who suggests the possibility of a Settlement Agreement to an employee. However, they can also be requested by an Employee.
Employers cannot “out of the blue” offer a Settlement Agreement proposal to an employee. If you wish to raise the option of a Settlement Agreement with an employee, you need to ensure that any communications are genuinely off the record.
In order to do this, there needs to be an “existing dispute”. This means that there needs to be some type of process which has started. Using the example of a redundancy situation, you would need to have already warned employees about the redundancy before having a conversation.
You have to make sure that all communications are marked “without prejudice”. You also have to use this wording before speaking with the employee on an off the record basis.
In the case of a redundancy situation, it is common for a Settlement Agreement to contain a “compensatory payment”. This is an amount which can be paid tax free (up to 30k) to the employee as compensation for loss of office. Say for example an employee was entitled to £5000 as a redundancy payment, the employer may offer £6000 through a Settlement Agreement. If an employee understands that they do not want to go through a redundancy process this may be enticing.
The benefit for the employer is that they don’t have to go through the redundancy process with the individual with all the risks that it carries.
