Settlement Agreements (Compromise Agreements)

A settlement agreement is the most common way of settling a dispute arising from the termination of employment. In employment law, if an employer and employee want certainty on the termination of employment (such as redundancy), there is only a limited number of ways they can settle a dispute, primarily:

a)                  through a Tribunal Order (whether after a hearing or by consent); or

b)                  through an ACAS “COT3” ­ the form that records the terms agreed; or

c)                  through a settlement agreement.

Neither party can force a settlement agreement ­ it must be a mutually accepted arrangement, usually following negotiation.

The law says that, to be affective, a legal advisor must have advised on the terms and effect of signing a settlement agreement. There is therefore usually a provision within a settlement agreement providing for a contribution to the employees legal costs.

When negotiated well, a settlement agreement can be a very successful means of making sure an employee is sufficiently compensated for the termination of employment, without bringing an employment tribunal claim.

Once signed, a settlement agreement signals a neutral agreement for the termination of employment and not necessarily a dismissal. This can be very important in certain sectors such as the financial services industry. Where the reason is redundancy it may actually be important for career and insurance reasons, for redundancy to be recorded in the settlement agreement.

A settlement agreement can also be used as a means of securing favourable tax treatment (especially ex gratia payments), the wording of references, post termination restrictive covenants and share option arrangements. Special care should be taken when drawing up a settlement agreement in the financial services sector with the advent of the new code on remuneration. Issues such as deferment, vesting, cash/equity splits and other matters will all need particular attention.

For more information on how Kervin & Barnes (based in Mayfair and the City, London) can help with your settlement agreement, call us on 0203 178 5361 or alternatively, click here to contact us by another method.