Mutual Employment Termination and Settlement Agreements

By David Coward

Employers and employees generally want to avoid confrontation and becoming involved in Employment Tribunal litigation. Employers in particular are usually concerned about the risk of Employment Tribunal claims being made if they dismiss an employee.

Employers can minimise the risk of any claims being brought by entering into a mutual termination agreement which waives or settles most types of employment claims.  To be effective in doing so, the agreement, commonly known as a settlement agreement, needs to be set out in writing and in a specific form.  

Typically, settlement agreements provide that an employee’s employment will come to an end on a particular date upon the basis that the employee will agree not to bring any claims against the employer.  The employer in return agrees to make a payment to the employee.  Payments made as compensation within a settlement agreement have tax advantages in that compensation payments of up to £30,000 can be paid on a tax-free basis.

A settlement agreement will only be legally binding if the employee has received legal advice from a relevant independent adviser (usually a solicitor) on the terms and effect of the agreement.  As settlement agreements tend to be of a ‘full and final settlement’ nature, benefiting the employer, it is standard practice for employers to pay a contribution towards the employee’s legal fees.

Employers need to take care with regard to the way in which any settlement negotiations are conducted to ensure that, if the negotiations fail and the employee subsequently brings any claims, that the discussions are ‘without prejudice’, i.e. cannot be referred to in court or tribunal proceedings, or are ‘protected’, i.e. cannot be referred to in any subsequent unfair dismissal proceedings.  For example, employees should be given at least ten days to consider the offer of a settlement agreement.

Settlement agreements can be beneficial to both employers and employees as a mechanism for enabling employers and employees to go their separate ways in a timely manner without unwanted disciplinary or performance management processes, or litigation.

For more information and advice contact David Coward on 01722 410664 or email david.coward@sampson>coward.co.uk

David Coward