If you’ve received a settlement agreement from your employer, you’ll naturally have a lot of questions.
Our award-winning solicitors have extensive experience in employment law. We routinely provide expert independent legal advice on settlement agreements to employees across all industries, helping them understand their rights and ensure terms are fair.
Below, we’ve answered some of the key questions we get asked most frequently. If yours doesn’t appear, don’t hesitate to contact our expert team.
1. Introducing settlement agreements
2. Negotiating and changing settlement agreements
3. Payments, tax and Universal Credit
A settlement agreement is a legally-binding contract between an employer and an employee, usually made for terminating the employment relationship. They typically contain payments to the employee – as a condition of accepting these payments, the employee will agree to not pursue any future claims against the employer in a tribunal or a court.
Formerly known as compromise agreements, a settlement agreement is entered voluntarily. It sets out terms and conditions between the two parties. In this way, settlement agreements are used to provide a clean, clear break – typically as a way of avoiding lengthy disciplinary or redundancy procedures and protecting the employer against any future claims.
Settlement agreements usually contain a number of elements.
Payments: Outlining the value of the termination payment, as well as any outstanding salary, holiday pay or commission to be paid.
Termination date: Stating when employment will end.
Non-derogatory clause: This prevents both parties from making further damaging or adverse claims or comments about the other.
Confidentiality clauses: These may relate to the fact the settlement agreement exists, its terms and the reasons for employment being terminated.
Claims: Outlining what claims you can and cannot bring against your employer in future.
Legal fees support: Outlining the amount that the employer will contribute towards the employee’s legal fees. Usually, this amount is £500+VAT.
Waiver: Confirming that the employee agrees to give up their rights to bring claims against the employer resulting from their employment and its termination.
Notice: Whether you’re required to work a notice period, and how long it will be.
Reference: Stating that the employee will receive a form of reference after the employment is terminated.
Sometimes, settlement agreements can contain ‘restrictive covenants’ – this may include preventing the employee from working for competitors or taking existing clients or customers with them.
As outlined in the Employment Rights Act 1996, for a settlement agreement to be a valid and legally-binding contract, there are a number of statutory requirements. These include that the agreement must be in writing, it must relate to a specific complaint or proceedings and the employee must have been informed by an independent legal advisor about the terms of the proposed agreement.
Settlement agreements and redundancy are two methods of ending an employment relationship, but they are not the same. With a redundancy agreement, there can be entitlement to statutory pay and a notice period. With a settlement agreement, both of these can be negotiated and agreed between the employer and the employee.
This means that settlement agreements can be used to terminate an employee’s contract without having to follow the usual redundancy or disciplinary procedures. They are not exclusively concerned with terminating employment, either – they can be used to settle a dispute and reach an agreement after which employment can continue.
Settlement agreements can be an effective, confidential means of dealing with disputes and defining responsibilities without having to follow potentially time-consuming, drawn-out disciplinary or redundancy procedures. They provide a clean, mutually-agreed break, avoiding court or tribunal proceedings.
Usually, yes – an employer will want to keep a settlement agreement confidential. In this instance, there will be confidentiality clauses contained within the agreement, typically relating to any discussion of the existence of the agreement, its terms and any negotiations.
Yes – for a settlement agreement to be valid, it is a requirement for the employee to have had independent legal advice. Not only this, but a specialist employment law solicitor will have the expertise and experience to guide you through the process, advising you on what’s realistic and achievable.
After reviewing your settlement agreement, your solicitor can advise on a number of things, including:
Whether the compensation and terms of the agreement are fair
The potential for negotiation of the agreement
What other options you may have, and the impact of those on your career
How likely you might be to succeed if you took your case to an employment tribunal
If you have been offered a settlement agreement, seek expert legal advice from an employment law solicitor as soon as possible. They will help you understand the implications of the agreement and guide you on how to proceed. In most cases, the employer will contribute towards your legal costs.
Employers usually offer settlement agreements during ‘protected conversations’, which are off the record, or ‘without prejudice’. This means it cannot be held against the employer in future proceedings. However, certain guidelines need to be followed during this conversation.
Do not resign, as this may weaken your position – remember, you have the right to negotiate the terms of the settlement agreement. A solicitor will be able to help you with this.
Yes, you have the right to reject a settlement agreement: it is non-compulsory. However, if you don’t accept the settlement and you refuse to negotiate, then your employer may choose instead to begin alternative disciplinary or redundancy proceedings.
Absolutely. These types of agreements used to be called ‘compromise agreements’ – employees are fully entitled to negotiate the terms of any settlement agreement. They are mutually-agreed contracts.
An expert employment law solicitor will be able to provide tailored advice on how to proceed with these negotiations, and indeed whether negotiation is realistic and achievable. Compromise goes both ways.
Yes. Provided the agreement hasn’t been signed by both parties, then it can be overturned, cancelled, rescinded or withdrawn by the employer. It’s only at the point of signing that a settlement agreement becomes legally binding and cannot be withdrawn.
Yes. Whilst it is typically the employer that initiates discussions around settlement agreements, an employee is perfectly within their rights to request one at any stage of their employment relationship.
To improve your understanding and maximise your chances of securing a desired outcome, this is best done with the help of a specialist employment law solicitor.
This completely varies on a case-by-case basis. Negotiations could take a matter of a few days, but may potentially last weeks or months depending on dissatisfaction with terms being offered.
The Acas Code of Practice on settlement agreements recommends giving employees at least 10 calendar days to consider a settlement agreement offer.
Every settlement agreement is different. What is fair, in terms of compensation, is dependent on your circumstances. If you have a large salary, you’ve been employed for a long time or have evidence of mistreatment, you may be able to claim a higher settlement.
Your solicitor will be able to give you their expert assessment of whether your agreement is fair when they have a full view of the case.
There is no limit on the amount you can be offered – this is completely dependent on negotiations – but these factors may influence the total settlement agreement amount:
Income: The greater your salary, the greater your settlement amount, as a rule.
Length of service: If you have been with your employer for a longer period of time – in particular, over two years continuously – you’ll usually receive a higher settlement. This is because the payouts during alternative proceedings, such as redundancy, are linked to service time.
Mistreatment: If you have evidence of having been mistreated, this can be used to negotiate a higher settlement amount.
Quality of legal advice: A talented employment law specialist will have the experience and know-how to analyse your situation and help you negotiate the optimum settlement.
Employer’s financial situation: Naturally, an employer in a healthy, strong financial position will be better placed to offer a larger settlement figure.
Age: If you are older, it may be more challenging for you to get a new job. You may also require a larger sum to support you. This may help you to negotiate a higher payment.
Some elements of your settlement agreement might be taxable. Usually, the first £30,000 of any settlement compensation agreement payment is tax free, but payments for contractual entitlements – such as untaken annual leave, bonuses and commission – will be subject to the usual income tax and National Insurance deductions.
Tax can be complex and it is worth enlisting expert advice on your situation.
The date you’ll receive your termination payment will be outlined in the terms of your settlement. It can be up to 28 days after the signed agreement is received until you get paid, but a more typical time period is 14 days.
If you’re negotiating a settlement agreement and think this may be too long, you can negotiate for this to be brought forward before the agreement is signed.
It is highly unusual for a settlement agreement to not be paid by the time stated in the terms, but it may happen, particularly in larger organisations. In this instance, the solicitor who advised you on the agreement will be able to help you chase the payment.
In the rare instance of it still not having been paid after chasing, then the correct procedure would be to lodge a claim for the agreement to be enforced in the court. Your legal advisor will also be able to guide you through this process.
Your right to claim for means-tested benefits like Universal Credit is unaffected by accepting a settlement agreement, but as a result of the termination payment, the amounts you’re entitled to may be affected.
This is because your eligibility for benefits is tied to the amount of savings you have, which may increase as a result of the termination payment. Advice should be sought from your Jobcentre Plus or policy provider.
The cost for settlement advice is typically in the region of £500+VAT at 20%, although it may be more or less depending on your specific case. Substantial negotiations on the terms of the agreement, for example, may incur an additional cost.
Your fee covers an in-depth analysis of the agreement’s terms and conditions.We can further advise on the fairness of the agreement and the potential for negotiation.
Many solicitors will work to the fee that is being contributed by the employer, so no costs need to be borne by the employee. For complete transparency and peace of mind, look for an employment law team who offer a fixed fee service – like us.
Whilst there is no legal requirement for employers to pay for the employee’s legal advice, it is typical for them to do so. This is because the employee must have received independent legal advice for the settlement agreement to be valid.
There will be a clause in the agreement detailing the size of this contribution – typically it’s in the region of £500+VAT. This means that, in most cases, the employee should bear no costs from legal advice associated with a settlement agreement.
Usually, it is the employee who signs the agreement first. Then, the employee’s solicitor will sign it and send it to the employer, who will sign it.
As soon as the settlement agreement has been signed by both parties, it becomes a legally binding document. You will have accepted its terms, typically meaning you will have lost your right to make a claim against the employer in a court of tribunal in return for a payment.
Once signed, it cannot be withdrawn, unless you’re able to prove that the employer acted improperly (such as pressuring you to sign).
No. Having a third-party witness is not a requirement for a settlement agreement to be legally binding, but they can be added as verification.
The only instance where a witness is required is if the agreement has been prepared as a deed. Your solicitor will be able to advise you on whether or not this is the case.
Unless specified otherwise in the agreement, its terms and conditions run indefinitely. There is no expiry date applicable.
Once a settlement agreement has been signed and is legally binding, then any breaches – whether by an employer or employee – can lead to the pursuit of compensation.
If an employee breaches a settlement agreement, they may be required to repay some of the settlement payment and the employer’s legal fees. If the employee successfully brings a claim for breach of contract, compensation for financial losses may need to be paid by the employer.
Seek professional legal advice as soon as possible if you believe a settlement agreement has been breached.
Our dedicated, award-winning team provides independent legal services and advice in relation to settlement agreements. We have decades of experience working with employees across all sectors to deliver a fast, personal and efficient service.
At what can be a stressful time, we offer clear, fixed costs and speak in plain, jargon-free language. We’re proud to say that 98% of our customers would use us again and recommend us to their family and friends.
If you’d like us to review your agreement, or you have more questions in relation to settlement agreements, we would be delighted to hear from you. Ring our employment law team on 0113 264 4414, or fill in our contact form – we will be back in touch as soon as possible to discuss the next steps.
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