When should a settlement agreement be considered?

Settlement agreements are a way of avoiding disputes going to tribunal, reducing risk and dealing with redundancy.

A 'Settlement agreement' (formerly known as a 'Compromise agreement') can be used to settle a dispute between an employer and employee and to terminate an employment contract. It is a legally binding contract in which an employee agrees not make a legal claim regarding their employment against their employer, normally in return for compensation.

A 'Settlement agreement' should be carefully constructed and negotiated between the employer and employee, as a failure to do so could result in an employment tribunal claim.

However, a 'Settlement agreement' can still be used even if a claim has been made to an employment tribunal which the parties have agreed to settle before the trial and includes specific optional clauses for settlements made in these circumstances.

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Before a 'Settlement agreement' can be legally binding it must meet the following requirements:

1. The 'Settlement agreement' must be in writing

2. It must relate to a particular complaint or legal proceedings made, raised or instigated by the employee

3. The agreement must state that the statutory conditions regulating settlement agreements have been satisfied

4. The employee must have received legal advice from a relevant independent adviser as to the terms and effect of the proposed agreement and, in particular, its effect on their ability to pursue a claim before an employment tribunal or court

5. When the relevant independent adviser gives the legal advice, there must be an insurance contract in force, or an indemnity provided for members of a profession or professional body, covering the risk of a claim by the employee in relation to the advice

6. The 'Settlement agreement' must identify the relevant adviser

Our 'Settlement agreement' allows you to be specific about the terms on which the employee leaves your company, including the amount of compensation to be paid, whether or not a resignation letter is required and if a reference will be provided to the employee. Furthermore, a solicitor is on hand at MyLawyer to provide advice and assistance in drafting the 'Settlement agreement'.

The information on this page applies to England and Wales only.

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