Settlement agreements are legal documents designed to resolve disputes and facilitate a smooth transition when employment ends. Under UK law, employees must receive independent legal advice before signing such agreements under the Employment Rights Act 1996.
These documents are widely used in England and Wales to either settle existing disputes or protect employers from the risk of a claim being raised in the future. A well drafted agreement will often offer benefits to both the employer and the employee.
In this article, we will provide you with all you need to know about settlement agreements, including how they work and the key elements they often include.
If you are considering a settlement agreement, then our experienced team at Elite Law Solicitors can help you understand your rights and what to expect from this arrangement. Our specialist Employment Solicitors are regulated by the Solicitors Regulation Authority and our firm has received over 1,600 reviews on ReviewSolicitors, the UK’s largest independent review platform for law firms.
If you require specialist legal advice or assistance relating to settlement agreements, please get in touch and book a free initial consultation today by calling 0800 086 2929, emailing info@elitelawsolicitors.co.uk or by completing our Free Online Enquiry Form.
What is a Settlement Agreement?
A settlement agreement is a legally binding contract between an employer and an employee that resolves any issues arising during or after the employment relationship.
This agreement ensures that the employee will not pursue legal action against the employer for any claims relating to their employment or its termination, typically in exchange for a compensatory sum.
Guidance from ACAS explains that settlement agreements are voluntary and must be entered into with the benefit of independent legal advice for the agreement to be legally valid under UK employment law. Settlement agreements are often used as a structured way to end employment on terms that are agreeable to both parties, preventing potential future disputes.
How do Settlement Agreements work?
Settlement agreements are typically established when attempting to settle a potential employment tribunal claim or other claim. For them to be legally binding, a settlement agreement must meet certain statutory conditions:
- It must be in writing.
- The employee must receive independent legal advice from a qualified advisor who is insured.
- It must identify a specific complaint or dispute that the agreement aims to resolve.
- The employee must have a clear understanding of the terms, including any claims that they are waiving.
Once both parties have agreed on the terms, the employer will typically draft the initial version of the agreement. The employee will then take the draft to an independent legal advisor such as one of our experienced Settlement Agreements Solicitors to review it. Negotiations may then take place to iron out any issues before both parties agree on the final contents. From here, it is a matter of signing the document to make it legally binding.
Do you have to accept a Settlement Agreement?
Ultimately, the decision to sign a settlement agreement is yours to make. If you, as an employee, choose not to sign a settlement agreement, then you will retain the right to pursue any claims against their employer through an employment tribunal or court. By not signing, you keep your rights to claim for issues such as unfair dismissal, discrimination at work, or unpaid wages.
In cases where the settlement agreement is proposed in the context of redundancy or potential dismissal, not signing could lead to you losing your job without the enhanced benefits that might have been offered through the agreement.
What should be included in a Settlement Agreement?
Some core elements are found in most settlement agreements to safeguard the position of both the employee and employer. These elements include:
Employee’s waiver of claims
This is a key part of the agreement where the employee agrees not to pursue any legal claims in exchange for the settlement sum provided.
Compensation details
This part clearly outlines the financial settlement offered to the employee, including any tax implications.
Confidentiality clauses
These clauses limit the employee’s ability to discuss the terms of the agreement or the reasons for their departure.
Return of property
There may be stipulations requiring the employee to return any company property.
Reference
Often, agreements include a clause that stipulates how the employer will provide a reference for the employee.
What non-financial terms can be included in Settlement Agreements?
Beyond the financial terms found in settlement agreements, it can be helpful to include a few non-financial terms to ensure both parties are happy with the terms of the agreement. So, consider the following terms for your settlement agreement:
Confidentiality
Besides the general terms of the agreement, additional confidentiality clauses might restrict the employee from disclosing company secrets or proprietary information.
Non-disparagement
Parties may agree not to make derogatory comments about each other, which helps maintain the professional reputation of both the employee and the employer.
Sometimes, terms regarding non-competition, non-solicitation, or non-dealing clauses are included to protect the employer’s business interests after the employee leaves. It is important for employees to be aware of any restrictions that may apply to them, so they are able secure future employment without jeopardising the settlement sum.
Future cooperation
This can include clauses requiring the employee to assist with matters relating to their time with the employer, such as legal disputes or regulatory investigations.
How much should a Settlement Agreement be worth?
The average pay out in a settlement agreement can vary widely depending on several factors ranging from the nature of the dispute to the employee’s salary and tenure at the company. While there is no standard pay out, amounts can range from a few months to several years’ salary, particularly in cases involving senior employees or those with long service.
Understanding these key aspects of settlement agreements can significantly aid both employers and employees in making informed decisions when considering or negotiating these documents. It ensures that both parties can reach a mutually beneficial resolution, effectively ending the employment relationship on amicable and respectful terms.
Do you need a Solicitor for a Settlement Agreement?
From a legal standpoint, having a professional look over the settlement agreement before signing is very important. For a settlement agreement to be valid, the employee must have received independent legal advice.
This advice must cover the terms and conditions of the agreement and the implications of signing it. Specialist Settlement Agreements Solicitors ensure that the employee fully understands what rights they are waiving and assess whether the compensation is fair and reasonable. They can also negotiate on behalf of the employee to improve the terms.
Settlement Agreement FAQs
Below are some answers to some of the most frequently asked questions about settlement agreements. These FAQs address common queries employees have when they are offered an agreement by their employer.
Why would an employer offer a Settlement Agreement?
There are several scenarios where a settlement agreement may be the best path forward for an employer. Generally speaking, these agreements are most often used to protect the employer from some form of harm – either financially or non-financially. Some of the main reasons employers suggest these arrangements is due to:
Risk management
Employers might propose a settlement agreement to mitigate the risk of potential legal disputes arising from employment issues such as dismissals, redundancy, or workplace conflicts. It’s a proactive step to prevent costly and time-consuming legal battles.
Maintaining reputation
Settlement agreements often include confidentiality clauses which help maintain the business reputation by preventing public disputes and discussions about the company.
Cost efficiency
Dealing with employment disputes in court or through employment tribunals can be expensive. Settlement agreements are a cost-effective solution that allows for controlling the financial impact associated with such disputes.
Control over terms
These agreements provide employers with the opportunity to negotiate favourable terms and ensure that business interests are safeguarded, such as including non-compete or non-disclosure clauses.
Are Settlement Agreements legally binding?
To be legally binding, settlement agreements must adhere to certain statutory conditions. The main takeaway is that you have to agree to it before it becomes legally binding, so make sure you take your time to look at the contents and take advice before signing it. It must also be a written agreement that has been reviewed by an independent legal professional. The agreement must also clearly identify the complaints or proceedings that it is settling.
Once these conditions are met, the agreement becomes legally enforceable, meaning that both parties are legally obligated to adhere to the terms set forth.
What are the benefits of Settlement Agreements?
Settlement agreements can be beneficial for both employees and employers for different reasons. So, below we have outlined some of the benefits that these agreements offer to both employers and employees:
Benefits of settlement agreements for employers
Settlement agreements provide a definite resolution to employment disputes. This certainty and closure is valuable when faced with potential legal issues. Similarly, it helps to avoid the unpredictable nature of an employment tribunal. Many employers will opt for these agreements to control costs and manage the financial outlay more predictably than in protracted legal disputes.
Benefits of settlement agreements for employees
Employees often benefit from a severance payment which might be more generous than statutory or contractual redundancy pay. A single lump sum payment can be very attractive, which makes these agreements popular with employees. It also should not cost you too much as an employee, as the employer will usually cover the legal costs incurred by the employee for consulting on the agreement. Finally, it allows for a dignified departure from the company, preserving professional relationships.
Is a Settlement Agreement the same as redundancy?
Redundancy is a specific form of dismissal from employment, typically due to the employer needing to reduce their workforce. A settlement agreement, however, can be used to resolve various disputes and is not limited to redundancy situations. There are other key differences between redundancy and a settlement agreement, such as scope. While redundancy is a reason for termination that might lead to a settlement agreement, the agreement itself is broader and may cover additional elements such as confidentiality, non-disparagement, and other post-employment obligations.
The other big difference is the compensation values. Redundancy pay is usually calculated based on age, salary, and length of service, according to statutory guidelines. Settlement agreements may offer compensation that exceeds the statutory redundancy pay and can be negotiated based on various factors.
How much do Settlement Agreements cost?
There is no pre-defined cost of a settlement agreement, which makes it hard to place a general value on them. From the employer’s side, the costs mainly stem from drafting the agreement and paying the settlement amount. For employees, the only cost could be legal advice, but employers may pay for some of this.
There are a few factors that can influence the overall cost of settlement agreements. If the agreement is quite complex, for example, then the costs associated with drafting it will rise. Similarly, if the agreement requires a significant level of legal involvement, the overall cost of it will increase.
When can I expect to receive my Settlement Agreement money?
Settlement agreements are designed to work for specific scenarios, which means that the timelines for receiving money will vary. With that said, once the bulk of the work is over then it is simply a matter of waiting for the pay out schedule to resolve.
Generally speaking, you can expect to receive payments within 2 to 4 weeks of finalising the settlement agreement. Before payment is made, any prerequisites such as the return of company property or fulfilment of certain conditions must usually be met.
Will I still be able to get an employment reference if I sign a Settlement Agreement?
It is quite common for settlement agreements to include terms regarding the provision of an employment reference. This can be particularly beneficial for the employee, ensuring they receive a fair and agreed-upon reference. Sometime, the reference’s content can be negotiated as part of the agreement but in the majority of cases employers agree to provide a factual and neutral reference that includes details such as employment duration and job title.
Having a reference included in the settlement agreement, even just a factual one, provides certainty to the employee and ensures there is no negative impact on their future employment opportunities due to the circumstances of their departure.
What is the difference between Settlement Agreements and NDAs?
At face value, a settlement agreement and a non-disclosure agreement (NDA) seem quite similar. Both documents are legally binding; however, their objectives differ significantly. NDAs primarily protect sensitive information, while settlement agreements address a broader range of employment issues, including claims and disputes. Below is an overview of the two different documents:
Settlement agreement
Aimed at resolving disputes between an employer and an employee, usually involving a financial settlement in exchange for the employee waiving their right to make any claims related to their employment.
Non-disclosure agreement (NDA)
Specifically focuses on confidentiality and the non-disclosure of proprietary information. NDAs can be standalone documents or part of broader agreements, including settlement agreements.
What happens if I breach a Settlement Agreement?
Breaching a settlement agreement, such as by disclosing information in violation of a confidentiality clause or failing to adhere to any post-employment restrictions, can lead to legal action by the employer. As you have already agreed to the terms of the agreement, by breaking them you place yourself in significant legal trouble. For example, the agreement may include clauses that stipulate financial penalties or the repayment of sums received under the agreement in the event of a breach.
Employers can seek enforcement of the agreement through the courts, which may include suing for damages or seeking specific performance of the agreement’s terms. So, in most cases, it is strongly advised not to breach your settlement agreement.
Are Settlement Agreements subject to tax?
The general rule is that settlement payments are subject to the standard tax regulations concerning employment income. However, there are specific exemptions and considerations. These include:
Ex-gratia payments
The first £30,000 of a genuine ex-gratia payment, which is a payment not required under the contract, can be paid tax-free. This is common in settlement agreements where the payment is compensatory rather than a reflection of the usual salary or wages.
Payments in lieu of notice (PILON)
All PILON payments are subject to deductions of tax and national insurance.
Legal fees
Legal fees paid directly to a solicitor as part of a settlement to receive advice on the agreement are typically not taxable.
Can I tell anyone about a Settlement Agreement?
Discussing your settlement agreement with others is potentially risky, so make sure you check the terms of the agreement before talking about it. Most settlement agreements include confidentiality clauses that restrict what the employee can disclose about the agreement’s terms and the circumstances leading to its signing.
In most cases, employees are allowed to discuss the agreement with their immediate family and professional advisors, provided they agree to keep the information confidential. However, the specifics can vary, and such allowances should be clearly stated in the agreement. It is worth being mindful of this, as breaching the confidentiality clause can result in legal actions for damages and the potential return of the settlement sums paid under the agreement. It is therefore important for employees to fully understand these restrictions before signing.
Speak to a Settlement Agreement Solicitor
Speak to a Settlement Agreement SolicitorAt Elite Law Solicitors, a large part of our work focuses on representing employees, ensuring they receive the most favourable terms possible, including maximum compensation and fair treatment of tax obligations. Our legal team can help clarify any ambiguities about the rights being waived and the implications of the agreement, providing peace of mind and ensuring informed decisions.
Philip Luff is an experienced employment solicitor with over 15 years’ experience advising employees on settlement agreements, unfair dismissal and workplace disputes.
Throughout his career, Philip has assisted clients with reviewing settlement agreements and negotiating improved compensation packages. As a practising solicitor regulated by the Solicitors Regulation Authority, Philip regularly provides independent legal advice required for settlement agreements, ensuring clients fully understand their rights and the terms being offered before signing.
Book a FREE initial consultation
To book a free initial consultation, please get in touch today by calling 0800 086 2929, emailing info@elitelawsolicitors.co.uk or by completing our Free Online Enquiry Form.
The content of this article is for general information only. The information in this article is not legal or professional advice. If you require legal or professional advice you should obtain independent expert advice from qualified employment law solicitors such as those within our firm.
