Settlement agreements

Settlement agreements

If you find yourself in a situation where your employer tells you they are “paying you off”, you should seek advice as soon as possible. Sometimes very little notice is given of the decision.

Your employer might give you a Settlement Agreement and tell you that you only have a short timescale in which to agree and sign it. If that happens to you, contact Allan McDougall Solicitors for advice.

A Settlement Agreement is a formal contract between an employer and employee. Once signed, it creates legally binding obligations on both parties. Usually, the main obligations in an agreement are that the employee agrees not to pursue claims, particularly employment-related claims, against the employer and, in return, the employer will usually make a payment to the employee.

What payments are included?

The payments incorporated in a Settlement Agreement depend on a number of factors but most commonly include:

  • A payment in lieu of notice (this is subject to Tax and NI Contributions);
  • A payment in respect of any outstanding statutory holidays not taken (this is subject to Tax and NI contributions);
  • An ex gratia (compensation) payment if there is a basis for one to be made;
  • A contribution towards the cost of your obtaining legal advice on the terms of the agreement.

Benefits of a Settlement Agreement

  • A quick resolution: Entering a settlement agreement avoids the delay of a formal dispute reaching a conclusion and also avoids the legal expense of litigation in a court or tribunal.
  • Certainty: Entering into a Settlement Agreement avoids the uncertainty and risk of a formal dispute being unsuccessful. The payment of compensation is guaranteed.
  • Tax-free: If an ex gratia (compensation) payment is made, it is tax free (up to a specified maximum).
  • Reference for future job applications: A Settlement Agreement usually includes an undertaking by the employer to provide a reference to future prospective employers.
  • Contribution to legal costs: Usually, an employer will agree to make some contribution to the cost of your obtaining legal advice on the terms of an agreement.

Why should I use a solicitor?

It is vital to ensure that your payments have been correctly calculated and to ensure that the terms about giving up future claims are properly and fairly worded. Also, other details in the agreement can be very important (even if your boss tells you they’re not).

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