A Settlement Agreement is a legally binding document which sets out the terms on which the employee’s employment or employment dispute will end. The purpose of a Settlement Agreement is to terminate the employee’s employment or dispute by offering the employee an appropriate sum of money bearing in mind the employee’s current salary, length of service and the reasons why the employer wishes to terminate the employee’s employment or the dispute has arisen. In return for accepting the sum of money, the employee agrees not to bring or continue any existing or potential claims against the employer. The only claims that cannot be excluded are for latent personal injury claims, accrued pension rights and claims to enforce the Settlement Agreement itself.
Under the Employment Rights Act 1996, the Settlement Agreement must be in writing and clearly state the complaints being settled and the employee must obtain independent legal advice on the Settlement Agreement. Tax and national insurance are payable on outstanding wages and holiday pay. However, redundancy payments up to £30,000 are usually free of tax. References for potential future employers are sometimes also included in Settlement Agreements. Although there is no legal obligation for an employer to provide a reference, if the employer does so then the reference must be true, accurate and fair and not misleading.