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Settlement Agreement

If you have been asked to sign a settlement agreement at work, take a look at our frequently asked questions to understand your rights. 

What is a settlement agreement?

A settlement agreement, also known as a compromise agreement, can be used to resolve or avoid a workplace legal dispute between an employee and their employer.

Settlement agreements usually set the terms of contract termination with an agreed severance payment given to the employee in exchange for certain requirements, such as waiving rights to bring future claims against the employer and agreeing to keep the terms of the agreement confidential.

Do I need legal advice on a settlement agreement?

Employment rights and claims can only be waived if the settlement agreement meets certain legal requirements. 

This includes the requirement for the employee to have received legal advice on the terms of the agreement from an independent adviser, such as a solicitor, before they sign the document. 

We offer a specialist settlement agreement service for employees. We will review the draft document, assessing whether the level of settlement is fair and if the employer has met all of its contractual obligations in respect of, for example, notice pay, payments for bonuses and commissions owed and other payments due.

In many cases, employers will pay some or all of the legal fees for the employee’s legal advice. You should confirm with your employer if and how much they will contribute to the legal costs.  

When are settlement agreements used?

Settlement agreements are widely used by employers as a standard approach to avoiding or settling workplace disputes.

Examples could include: 

  • Where an employee is being made redundant
  • If an employee is subject to disciplinary action 
  • Executive severance and senior-level exits 
  • Other workplace disputes or claims
  •  

Where there is an actual or potential employment law claim against an employer, and attempts to resolve the issue through internal processes or alternative methods have failed or are not appropriate, a settlement agreement is often used to bring the matter to a close by terminating the employee’s contract of employment on mutually agreeable terms.

Settlement agreements are commonly used to avoid claims such as unfair dismissal resulting from redundancy processes and performance management; constructive dismissal during misconduct investigations; or following a discrimination grievance. They can also be used to settle an employment tribunal claim at any stage during the proceedings.

 In theory, they can be offered at any time during the employment relationship, or afterwards.

While commonly used to bring an employment contract to an end, they can also be used as a method of dispute resolution to resolve an ongoing workplace dispute while the employee remains employed. 

Do I have to sign a settlement agreement?

Settlement agreements are voluntary. You are under no legal obligation to sign a settlement agreement. Employers are not allowed to coerce or force you to agree and sign.

This is where independent legal advice will be critical. We can help you understand whether the agreement is offering a fair settlement in the circumstances or if you could secure a better deal or should explore alternative courses of action.

If a settlement is not possible, we can advise on your options and next steps.

Importantly, you should note that conduct during the settlement negotiations may be scrutinised should the matter proceed to the employment tribunal. Should you reject a reasonable offer, you could risk costs awards being made against you by the tribunal.

I have been offered a severance payment, is it a fair settlement?

Any agreed pay out for signing a settlement agreement will depend on a number of factors including:

  • Your contract terms 
  • Whether you have a valid claim
  •  The reason for contract termination
  • Your conduct and whether you have done anything wrong
  • Your objectives – for a swift, clean break or to risk and hold out for maximum payout
  • How settlement negotiations are handled

Any offer should be broken down into constituent parts so that you can understand how the calculation has been arrived at and whether it is at a fair level in your circumstances. Usually this would include:

  • Loss of office compensation
  • Notice payment, accrued holiday pay
  • Bonuses & commissions owed
  • Loss of pension
  • Private insurance

We help employees understand how much they are owed under their minimum legal entitlements under statute and under contract, and ensure these are included within the settlement calculation.

We then look at the additional compensation element for loss of office, and what would constitute a fair and reasonable amount.

This requires consideration of multiple factors.

We will first look in general terms at the circumstances of the agreement and how much we would expect you to be paid, and apply this to the specific facts of the case. 

Some types of claims command higher compensation, for example, there is no cap on the amount of compensation a tribunal can award for discrimination claims, making the financial value potentially greater than other claims, such as unfair dismissal where a limit applies.

If you are subject to compulsory redundancy, your position is not going to be replaced and there is no suitable alternative employment, settlement will usually be limited to the statutory levels, for example if you have more than two years’ continuous service, you could expect between 1 and 3 months’ gross salary payment.

In some circumstances, for example where there are potentially legal or reputational risks for you, you may walk away without a payout or you may have to pay your employer as part of the termination in favour of the clean break and the employer waiving their rights to bring future claims against you.

We have substantial experience in all types of employment claim across market sectors, job roles and seniority levels to provide guidance on compensation levels and help you understand what is likely to be deemed fair and reasonable in your case.

Is a settlement agreement legally binding?

To be legally binding, the agreement has to meet certain conditions.

It has to be in writing, it has to address the specific dispute or issue in question only and it must set out the agreed obligations of both the employer and the employee. 

The employee must have received independent legal advice from a relevant independent adviser such as a solicitor. The adviser must be identified in the agreement and they must be insured to cover the risk of a claim from the employee in respect of any loss arising from the advice given. The agreement must also record that the requirements regulating the settlement agreement have been satisfied.

Where these conditions are not all present, the agreement may not be lawfully binding on you, but it will remain so on your employer. Take advice to confirm your position.

Generic, template agreements carry significant risk in failing to meet these requirements, and as such may be rendered legally unenforceable. 

What should a settlement agreement include?

Employees have a number of statutory rights, including:

  • Right not to be unfairly dismissed
  • Right to be given holidays and paid holiday pay
  • Right to a maximum working week
  • Right to not to be discriminated against or harassed
  • Right to be paid sick pay
  • Right to protection as a whistleblower

Settlement agreements can be used to waive the employee’s rights to bring a claim for breaches of these statutory rights where the agreement meets the legal requirements. 

The agreement should set out clearly the obligations on both parties given the specific nature of dispute, claim or circumstances. They should offer a ‘clean break’ for both the employee and the employer, with certainty as to the terms of the contract termination.

Details could include the date of termination, an agreed level of severance payment, how the employee’s notice period and outstanding holiday pay will be dealt with and agreed wording for a professional reference.

The employee will usually be agreeing to keep the terms of the agreement confidential, not to speak detrimentally about the company, to waive certain statutory, contractual and tortious claims against the employer and to return company property.

What happens if you breach a settlement agreement?

The agreement should state what happens in the event either party breaches any of the terms. Failure to meet the obligations under the agreement can give rise to a claim for breach of contract.

Generally, this will mean repaying some or all of the payments made by your employer, together with any legal fees they incurred as a result of the breach.

Do I have to pay tax on a settlement amount?

Whether you have to pay tax on the settlement amount will depend on how much you are paid.

An agreed amount of compensation for loss of employment to the employee can be tax-free up to a maximum of £30,000 provided it is a compensatory rather than contractual payment.

Specific areas which should be considered professionally include notice payments and impact on pensions, to achieve a tax-efficient arrangement and payment.

Take specific advice if you are concerned about the tax implications and potential liabilities of larger severance payments.

What is ‘without prejudice’ or a ‘protected conversation’?

Communications between you and your employer, such as letters or conversations, may be headed or preceded as being ‘without prejudice’. The intention is to indicate that the item cannot be disclosed or admitted as part of any tribunal proceedings that may follow.

A ‘protected conversation’ is slightly different in that it relates to a discussion instigated by either the employer or employee to first raise the matter of a settlement agreement without a pre-existing dispute. 

Again, the intention is to indicate that the discussion cannot be disclosed or admitted as part of any tribunal proceedings that may follow, unless an exemption applies, for example in discrimination cases.

Do you need help with a settlement agreement?

Our specialist employment lawyers are on hand to support you with any issues relating to a settlement agreement with your employer. 

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