Settlement Agreements (Employees)

What is a Settlement Agreement?

Under the general law employees can contract out of most of their rights without any formality. On the other hand, it is only possible to settle statutory claims, such as not to be unfairly dismissed or discriminated against in limited circumstances and one of these is a settlement agreement.

In order to be valid, a settlement agreement must be in writing, refer to the particular claims being settled and, before the agreement is signed, you have to have taken independent legal advice as to the terms and effect of the agreement and the solicitor must carry insurance.

What are the benefits of a Settlement Agreement?

A settlement or settlement agreement gives you certainty.

You know what you will receive and can move on, without having to think about or continue a claim, where the outcome is always uncertain.

You get closure on the past and can move on to the future.

What does a Settlement Agreement contain?

Here are some of the usual terms:

  • Leaving date: if you are still employed
  • Money and payment terms: the settlement agreement should set out exactly what the employee is going to receive. Any benefits and the amounts which are going to be paid should be broken down into any payment in lieu of notice (PILON), any accrued holiday pay (usually both of which are taxable) and compensation, including a redundancy payment. Compensation is tax free in the employee's hands up to £30,000. Above that amount it carries tax at the employee's top rate. The payment date should also be mentioned.
  • Resignation of directorship(s): if applicable.
  • Announcement: this can be either internal or external (or both) and the agreed wording is usually attached as a schedule to the agreement.
  • The claims being settlementd: this is usually a long list of all possible contract, tort and statutory claims that it is possible to bring and not all of which are relevant!
  • Tax indemnity: it is standard for the individual to agree to bear any tax risk and to indemnify the employer should any tax become payable on the compensation or other benefits.
  • Return of the employer's property: this is a standard term.
  • Derogatory remarks: generally the employer requires the individual not to make any disparaging or derogatory statements to anyone about it and sometimes the employee can obtain a similar undertaking from the employer.
  • Confidentiality: Both parties agree to keep the terms of the settlement agreement confidential. The individual also agrees not to use or divulge the employer's confidential information.
  • Post employment restrictions: the employee accepts some restrictive covenants (such as not to solicit clients or customers, not to poach remaining employees and not to compete) for a period after the employment ends. If these are wider than the existing provisions then the employer should make a payment (which will be taxable) for them.
  • Reference: The terms can be agreed and a draft is usually attached as a schedule to the agreement.
  • Legal costs: the employer pays either all or a contribution towards the employee's legal costs of taking advice on the settlement agreement. The solicitor's invoice is made out to the employee but marked payable by the employer and the employer pays the solicitor direct.

Not Happy with the offer?

You do not have to sign what you are offered.

Roberta can help negotiate improved terms.

How much will it cost?

Generally, the employer pays the legal costs of taking the advice or the employer makes a contribution towards them.

Often the initial offer does not cover all of the fees and depending, the costs can be negotiated. If the costs offered by the employer do not cover the extra cost, we charge an hourly rate. We can agree any additional costs with you in advance or give you an estimate, since it is not always possible to predict precisely the length and complexity of negotiations or the employer's attitude.

What documents you'll need.

In order to advise you properly, as well as the draft agreement, we need to consider your employment contract, staff handbook or disciplinary and grievance procedures and any correspondence (letters, emails, memos) about the termination of your employment.

For more help and information on Settlement Agreements please telephone Roberta