Settlement Agreement FAQs Guide

You are bound to have lots of questions about your settlement agreement offer. This Guide, written by an expert solicitor, provides answers to the most frequently asked questions by employees.


What is a Settlement Agreement?

A Settlement Agreement is a contract between an employer and an employee, which settles claims an employee might have, such as: unfair dismissal, breach of contract and workplace discrimination. An employee is required to have independent legal advice on a settlement agreement – usually from a solicitor.

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What is a Compromise Agreement?

The term Compromise Agreement is another name for a Settlement Agreement. The official name changed to ‘Settlement Agreement’ in 2013, alongside other changes in the law, which allowed employers to have protected conversations with employees to make a settlement agreement offer.

Is the settlement payment tax-free?

Usually the first £30,000 of a termination payment can be paid tax-free. If you have not worked or been paid in lieu of your full notice entitlement, this might result in the termination payment becoming taxable. This can make a significant difference to how much money you receive. Your employment solicitor will be able to advise you about the tax – they deal with this all the time and will be able to help structure the deal in a fair, legal, tax-efficient way.

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Why use a Settlement Agreement?

Settlement Agreements are used to resolve employment disputes and/or end the employment relationship on agreed terms. They are an effective way of preventing or resolving employment disputes and provide certainty to both parties. Once signed, an employee will be prevented from bringing employment claims.

Is the settlement offer fair and should I accept?

That depends on the offer, the strength of any claims, how long you’ve been employed, as well as your attitude to risk, ability to fund legal expenses and other factors, which will be personal to you. Our expert solicitors are able to advise you on whether the offer is reasonable.

Tip: Try our Settlement Calculator.

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Why do I need a solicitor?

It is a legal requirement that an employee has their own legal advice from a qualified person, usually a solicitor. A solicitor will advise on the terms and effect of the settlement agreement so you can decide if you want to accept the offer.

Your employer has an interest in you obtaining advice from a solicitor because otherwise the written agreement (even if signed by you) will not legally prevent you from bringing statutory employment claims, for example unfair dismissal or discrimination.

How much does this legal advice cost?

Usually your employer pays towards the cost of an employee getting legal on the settlement agreement. A typical employer contribution is between £250 and £750. After the agreement is signed, the solicitor sends their invoice directly to your employer for payment.

Solicitor Costs Guarantee:
Our solicitors promise they will not charge more than the amount your employer agrees to pay for a solicitor to advise you on the agreement and sign it off for your agreement.

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When are Settlement Agreements used?


Redundancy Settlements:

Settlement Agreements are often used in redundancy scenarios, where the employer offers to pay the employee more than the basic statutory redundancy pay entitlement. In exchange for paying more, the employer may require the employee to sign a settlement agreement.

Disciplinary Settlements:

The employer may not be happy with the employee’s standard of work. Rather than go through a formal performance improvement plan / procedure, the employer may decide to offer the employee an alternative to leave earlier in the procedure and receive a settlement payment under a settlement agreement.

Sickness/Incapability:

If an employee is not capable of work because of illness or a lack of skill or experience, one option may be to agree to the employee leaving under a settlement agreement. Sometimes, both parties would prefer to agree an earlier amicable settlement rather than go through a long drawn out capability procedure that might end in dismissal.

Work relationship breakdown:

Sometime the work relationship breaks down between the employer and employee, or the employee and colleagues. The parties may prefer to agree an amicable parting, where the employee receives a severance/termination payment.

Employee Grievance:

The employee may have grievances and potential claims against the employer for the way she/he has been treated at work. Rather than bring employment claims, an agreement may be reached and recorded in a settlement agreement.

I’m happy with the settlement offer and need a solicitor to sign-off. What next?

If the settlement agreement is ready to sign you can go for our fast solicitor advice service from our solicitors. It can all be done by telephone and email. The solicitor will advise you on the terms and effect of the agreement and send a legal adviser certificate to your employer.

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How do I negotiate a better deal?

You don’t have to accept the first offer. In fact you don’t have to accept the settlement agreement at all. Consider what you want to achieve, and weigh up the pros and cons of the deal. Sometimes, there are non-financial factors to think about, such as a reference or an amicable quick resolution, compared to an employment tribunal.

Tip: Read our guide on how to negotiate a settlement.

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What is the effect of a entering into a Settlement Agreement?

By entering into a valid Settlement Agreement an employee agrees to give up certain legal rights usually in return for a severance payment or termination settlement package. The main effect of the agreement is that you won’t be able to bring an employment tribunal or court claim.

Settlement counter-offer:


I’m not happy with the financial terms:

Some employees are not satisfied with the financial deal or the terms of the agreement and will instruct their solicitor to negotiate for them. The ability to negotiate will very much depend on the circumstances and strength of the individual’s case. The stronger the legal basis for a claim, the more likely it is that employers will be receptive to negotiations to increase the compensation and amend terms in the employee’s favour.

Changes to the Settlement Agreement wording:

You may want to make changes to the Settlement Agreement wording to protect you.

Examples:

• Adding a clause to require your employer to provide a reasonable job reference to a new employer;
• making sure all the payments, monies and benefits you are entitled to are included in the settlement, including accrued salary, accrued holidays, bonuses, commission payments, shares, SAYE shares, long-term incentive plans, private health cover, company car or car allowance. This is important because usually a settlement agreement will be drafted to be the entire agreement, meaning any payments or benefits not covered in the agreement will be lost;
• an agreed internal or external announcement to colleagues and customers;
• changes to the clauses dealing with tax (known as a tax indemnity);
• amending or removing post-termination restrictions that may make it difficult for you secure new work; and/or
• deleting clauses that are unreasonable or to remove or minimize risk.

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Is a settlement agreement the same as redundancy?

Employers can make an employee redundant without using a settlement agreement. However, some employers require employees to sign a redundancy settlement agreement when they are paying more than the statutory minimum redundancy. This prevents the employee from taking the extra cash and still bringing a tribunal claim.

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What are the legal requirements of a settlement agreement?


To protect employees who may be unaware of their legal rights, the law states that Settlement Agreements are not legally enforceable unless they meet certain minimum requirements:

• The agreement must be in writing.
• The agreement must relate to ‘particular proceedings’ i.e. particular complaints that the employee may have.
• The employee must identify a relevant independent adviser from whom the employee has received advice as to the terms and effect of the proposed agreement and in particular its effect on the employee’s ability to pursue their rights before an employment tribunal.
• The adviser must be covered by professional indemnity insurance.
• The agreement must state that the legal conditions regulating settlement agreements are satisfied.
If the agreement does not comply with these minimum legal requirements, it will not be valid and an employee will still be able pursue a claim against their employer, although he/she will probably have to repay any monies received, or they will be deducted from any compensation the employee is awarded.

What are the usual terms of a settlement agreement?

The terms included in a Settlement Agreement will vary depending on the circumstances of the particular case. However, it is common for Settlement Agreements to contain clauses dealing with the following:

• The date employment terminated;
• List of claims settled;
• Settlement package including when payment will be made and by what method;
• Parties understanding of the tax position;
• Tax indemnity from the employee;
• Reminder of any restrictive covenants or confidentiality obligations in the contract
• Confidentiality about the fact, content and circumstances of the agreement
• Obligations on the employee or both parties not to make or publish any derogatory comments;
• An agreed reference;
• Repayment provisions for breach by the employee of the settlement agreement
• Employer contribution to the cost of obtaining legal advice on the terms of the agreement;
• Arrangements on termination.

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Are there any claims that cannot be settled by a Settlement Agreement?

Not all claims can be settled by a Settlement Agreement, for example the right to statutory maternity pay. Usually the agreement will be drafted so you can still sue in relation to accrued pension rights, latent personal injuries and breach the agreement.

Are there other ways of settling employment disputes?

Where an Acas conciliation officer assists in the negotiation of the settlement of an employment tribunal claim (or potential claim), a COT3 agreement is used to record the terms of settlement. A COT3 agreement is a much simpler straightforward agreement that does not have to adhere to the formalities of a settlement agreement because it is negotiated with the assistance of an Acas conciliation officer.

Can I get a reference letter with a settlement agreement?

Your solicitor can negotiate an agreed job reference letter wording, as part of the settlement agreement. The settlement agreement will then have a clause requiring your employer to provide the agreed written reference to a new or prospective employer on request.

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For solicitor advice, please call 0800 088 4021.

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IMPORTANT: The contents of this page are general guidance only and should not therefore be regarded as constituting legal or other advice. There are strict time-limits on bringing claims in the employment tribunal. You should therefore seek legal advice from an employment solicitor about your particular situation without delay.