Settlement Agreement

A Settlement Agreement, also known as a Compromise Agreement, contains the terms including financial settlement by which the Employer Employee relationship comes to an end. It is a legally binding document which sets out the departure between the parties and once the document is signed, no party can bring an action against the other.

Need for a Settlement Agreement: Settlement Agreement can be offered at any stage of employment. For eg: if Employees A and B in the same work department don’t get along and it, in turn, affects the performance of other working employees then either A or B could ask for settlement for Employer along with a good reference. Similarly, if there are disputes between an employer and employee that don’t get resolved through internal procedures or communication, then Settlement Agreement serves as an effective way to end the professional relationship of Employer and Employee without either of them resorting to legal procedures. The Agreement contains such terms and conditions in the Agreement that are mutually agreed and can be avoided if there is any sort of disagreement. Employers use Settlement Agreement largely because it helps in avoiding legal claims from employees which are costly and can drag disputes to the Employment tribunal.

Considerations of Settlement Agreement: Employer’s Perspective: The things to bear in mind regarding the payment of money to Employee depends on a number of factors such as remuneration, annual leave of Employee, reason for offering Settlement, the time that is going to be consumed if Settlement Agreement is not reached, difficulty in filling the new post vacated by the leaving Employee, time taken by Employee to find a new job etc.

Things to be included in a Settlement Agreement: Employees perspective: A Settlement Agreement includes a financial payment but again there are various categories of payment that are expected by an Employee from Employer and it must all be set out in the Settlement Agreement. This is because once the Settlement is done the Employee cannot take legal recourse against the Employer at any future date.

  • Salary and benefits: The Employee must make sure that the Employer makes the payment of salary till the termination date. Apart from this , if there are other benefits which are pending when the Employee is serving the notice period for e.g. Health care, the Employer cannot restrict the Employee from utilizing the benefits
  • Unused Holidays: If the Employee has not utilized the sick leaves that are permitted annually then the Employee can seek payment for the unused holidays.
  • Payment in place of notice: When the Employment gets terminated by a Settlement Agreement, then the Employee might not have to serve a notice period and the Employee can get the payment for the amount of time Employee would have served in the notice period.
  • Ex-gratia payment: If an Employee gets terminated and is made to sign a Settlement Agreement to avoid legal battle then in that case the Employee can ask for lost earnings because of unfair dismissal.
  • Understanding unfair dismissal during Settlement Agreement: An Employer might offer a financial settlement in the pretext of company’s welfare but it is important to scrutinize the situation to avoid unfair dismissal.

For eg: if an Employee has developed an illness due to certain working posture which elongates over a period of time and the Employer states reason of bad performance to remove the Employee then the Employee must reject the Settlement agreement. This is because the settlement is offered on grounds of unfair discrimination.

Conclusion: Discussing and negotiating the terms of Settlement Agreement is as important as knowing the reason of Settlement Agreement. It is both Employer’s and Employee’s prerogative to either accept or reject the Settlement Agreement depending on the gravity of situation. However, It is suggested to take legal advice before accepting Settlement Agreement because once it gets signed, there is no room left to legal action against the Employer in an Employment Tribunal, howsoever unfair is financial Settlement.

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