Settlement Agreements

Our Employment Solicitors are experienced in negotiating and advising on settlement agreements to protect the best interests of the employee.

Expert Settlement Agreement Legal Advice

Drawing up settlement agreements between an employer and employee is a common practice. Nevertheless, if you’ve been offered a settlement agreement from your employer, you may feel anxious and unsure about what the next best steps are. Do you need to accept the agreement? Do you need to negotiate the terms?

When it comes to an employment settlement agreement, it is compulsory for the employee to receive independent settlement agreement legal advice. At Newtons, our employment law team are well-versed in negotiating and advising on settlement agreements to protect your interests as an employee best.

What is a Settlement Agreement?

A settlement agreement, formerly known as a compromise agreement, is a legal contract drawn up between an employer and employee. Typically, its purpose is to confirm termination of someone’s employment and ensure that the employee will not bring legal claims against the employer, in return for compensation, usually financial.

What are the Types of Settlement Agreement?

As settlement agreements are legally-binding, voluntary and subject to negotiation, it is important to receive settlement agreement advice from a specialist solicitor before agreeing to the terms.

In most instances, a settlement agreement is drawn up to achieve an amicable and fair separation between employer and employee, i.e. to draw a line under a period of employment. Usually, this is instigated in response to concerns over employee performance or conduct. Nevertheless, there are other types of settlement agreement scenarios:

Redundancy: If you are being made redundant, your employer may offer you a redundancy settlement agreement. The redundancy process can be complex, time-consuming and costly. Therefore, it is common for companies to offer a redundancy settlement agreement to reduce the risk of future Employment Tribunal claims, to minimise the consultation process and unsettling other employees.

To avoid the Employment Tribunal: If you bring an unfair dismissal claim or mistreatment claim against your former employer, they may offer you a settlement agreement to stop the claim being brought to the Employment Tribunal, to avoid the subsequent costs, management time and negative publicity.

Ill-health: If you have a long-term health issue impacting your work, your employer may offer you an ex-gratia (goodwill) payment in return for your resignation. They may ask you to sign an employment settlement agreement to avoid disability claims being brought against them in the future.

Non-financial payments: A settlement agreement may be used by an employee to secure non-financial payments in their employment package, such as a company car or private health insurance. 

Grievance: If you have a raised a valid grievance with your employer, they may offer you an employment settlement agreement in order to keep the grievance confidential.

What Terms are Typical of a Settlement Agreement?

It’s typical for a settlement agreement to involve additional terms on top of the requirement to give up any rights to make a claim. Examples include:

Confidentiality clause: This prevents either party discussing the terms of the agreement with others. This may also stipulate that the parties should not speak ill of each other outside of the employment relationship.

Return of property: The employee will be required to hand back any property belonging to the company. This can include physical property, such as a company car, and electronically stored data, such as computer files and passwords.

References: It’s typical for an employment settlement agreement to include terms requiring the employer provides the employee with suitable references.

Repayment clause: If the employee fails to comply with the various obligations set out in the settlement agreement, they will be liable to repay the sum provided by the employer and indemnify against any legal costs incurred.

Warranty: The employment settlement agreement may include a warranty on the part of the employee to confirm that they have not done something which could affect the employer’s decision to enter into the agreement. This could include the employee accepting a new job offer or committing an act of misconduct that the employer is not aware of.

Why do You Need Settlement Agreement Advice?

To ensure the agreement protects your interests:

Settlement agreements are complicated and multifaceted documents. As an employee, there are many factors you need to consider when reviewing the agreement. You need to be confident that the agreement is fair and covers the appropriate terms. With solid settlement agreement legal advice, you can be confident that the agreement best protects your interests, is fair, clear and covers all bases.

To ensure the agreement is valid:

What’s more, you need to be assured that the settlement agreement is actually valid. Employment settlement agreements are required to meet certain requirements, which we share below. A settlement agreement solicitor will confirm the validity of the agreement.

To ensure you understand the potential value of potential claims:

Before signing a settlement agreement, an employee should consider whether they may have any potential claims against their employer. You should receive independent settlement agreement legal advice regarding the potential values of any such claims, should they be taken to the Employment Tribunal.

Once you sign, you could and probably would be prevented from pursuing a claim arising from your employment. In practice, you usually cannot waive:

• A claim which you are not contemplating
• Claims that have not yet arisen (e.g. future claims)
• Personal injury claims of which you are not aware of
• Claims for accrued pension rights

However, if you have any potential claims against your employer, they should be addressed in the employment settlement agreement or specifically be excluded. Speak to your settlement agreement solicitor about such claims before signing.

What Makes a Settlement Agreement Valid?

For a settlement agreement to be valid, the following requirements must be fulfilled:

• The agreement must be in writing
• The agreement must relate to particular complaints or proceedings
• The employee must have received independent legal advice on the terms and effects of the agreement
• The legal advisor must be named in the agreement and must also have the appropriate indemnity insurance

Are Settlement Agreement Payments Taxed?

Some of the payments in a settlement agreement may be tax-free. Typically, ex gratia (goodwill) payments above any included in your employment contract and redundancy payments are tax-free up to £30,000. However, the Inland Revenue make the final decision.

It’s important to fully understand how taxation will affect your settlement agreement before signing. It is common for settlement agreements to include an indemnity clause saying that, in the event that the payment is found to be taxable, the employee rather than the employer will be liable and responsible for any tax, National Insurance (possibly employer’s National Insurance also) or fines due in relation to the payment. If the payment is found to be taxable, you may be liable to pay more than if the payment was taxed normally.

Who Covers the Legal Fees in Regards to a Settlement Agreement?

Typically, your employer will make a contribution to cover your legal fees, and this should be specified in the settlement agreement. However, it is ultimately the employee’s responsibility to cover the fee for independent settlement agreement advice.

If you are an employee seeking settlement agreement legal advice, please get in touch with our experienced employment law team who are keen to help. You will also find more information on how we can help in our recent case study, where we explain how we helped our client settle her unfair dismissal and sex discrimination claim before the Employment Tribunal.