Settlement agreement

About this agreement

There are limited ways, subject to strict criteria that you ensure that an employee contracts out of the right to make a claim before an employment tribunal. Unless you use the right document, your agreement will not qualify and the dismissal could be classed as unfair.

This compromise agreement (also called a termination or severance agreement) sets out the financial and other terms on which employment or an employment dispute will end.

Significantly, it includes the right legal provisions to ensure that the employee is prevented from claiming before an employment tribunal later on.

This agreement also covers all other practical matters such as compensation, termination dates, entitlement to pay and benefits, outstanding holiday or holiday pay, and confidentiality. It is comprehensive and suitable for settling the claim of any employee.

The law relating to this document

Compromise agreements are recognised by statute law as the only way to give a full and final settlement to any current or later claim without tribunal or court proceedings having first been started.

There are strict requirements that must be fulfilled for an agreement to be valid. These include:

• The agreement must be in writing and state that the conditions regulating compromise agreements have been satisfied

• The employee must have received legal advice from a qualifying independent adviser on certain aspects of the agreement. The adviser usually signs the agreement as proof that he has given advice.

• The agreement must clearly identify the complaints being settled. It cannot be worded as a blanket agreement against every possible future claim.

When to use this document

Even when an employer has followed a fair process, a termination agreement is still a useful tool to ensure that there is no unexpected action later on. Often, many individuals have second thoughts about issuing a claim, particularly if they remain unemployed for longer than they expect after they have left.

Many professional advisers overlook the necessity for the employee to have a prospective or actual claim. In most cases it will be necessary to have terminated the employment before this type of agreement can be used to any effect. However, that is not to say “without prejudice and subject to contract” negotiations cannot take place in the knowledge that a termination is proposed.

The most common reasons for using this severance agreement would be:

• to settle an existing claim, for example where the employee alleges discrimination, harassment or victimisation, breach of contract or employment, or unfair or wrongful dismissal

• to avoid legal challenge in redundancy situations

• to remove an employee on the grounds of poor performance or misconduct

• to remove employees without internal or external publicity, particularly senior staff

Note: this document will not be valid to prevent a claim made under the TUPE Regulations.

Features and contents

• Suitable for an employer in any organisation
• Intended for use where employment has already terminated, but also can be used as a basis for negotiations
• Drawn to settle very large claims with senior staff, but suitable, with deletions, for junior staff
• Provides certainty to both the employer and employee as to how the employment relationship ends
• Prevents later application to employment tribunal

The agreement includes the following clauses:

• Continuation of employment until a termination date
• Extent of continuing entitlement to pay and benefits
• Return of organisation's property, including a company car
• Confidentiality clause
• The compensation package
• Restrictions on future competition by the ex-employee
• Press release and publicity
• Information to qualify the agreement under Employment Rights Act 1996 section 203
• Other legal provisions to protect your interests