Settlement agreements (formerly known as compromise agreements) are a popular and efficient way for employers and employees to formalise the termination of employment.
Along with accounting for the employee’s notice pay, contractual benefits and accrued salary and holiday pay, the employer must pay the employee an ex gratia element, ie, an amount of money that they aren’t legally obliged to, in order for the employee to sign the document. In exchange, the employee forgoes their rights to bring any claims related to their employment and also enters into obligations of confidentiality and, in certain instances, restrictions on future employment with competitors of their former employer.
Settlement agreements must comply with legislation in terms of content and format, and must be signed off by a solicitor or qualified legal representative to be valid. In most cases, the employer will pay a contribution towards the legal fees of the employee in signing off the document.
The reason why these agreements must be signed off by a lawyer is that they may contain obligations which might be unfair or unlawful and which it would be unreasonable to expect an employee to enter into. Also, the amounts specified in the agreement must be carefully considered as to whether they provide adequate compensation for giving up the right to make a claim, should the employee genuinely have one, against the employer. Careful drafting of the document in the first place should ensure smooth and expedient negotiations.
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