This guide has been written by a specialiast employment solicitor with more than 20 years experience providing employment law support and settlement agreement advice. The guidance below is streamed to help employees depending on their situation and goals. Employees tend to fit into one of three situations:
- Ready to sign – happy with the deal
We suggest you jump to the FAQs section below, and read the first 7 Q&As. These cover the key points and will take 3 minutes to read. Alternatively, watch a short video below (2 minutes). If you have your settlement agreement, go for our express sign-off service.
- Not ready to sign – looking to negotiate
This group will be interested in the content on settlement agreement offers, negotiations, and when to initiate settlement discussions, and how to counter. Take a look at the FAQs no. 8-12.
- Deep-dive – still in learning mode.
There’s a lot more guidance on specific settlement agreement topics across the site, all drafted by qualified employment solicitors . The guide below gives quick short-form answers to specific topics, like job references, bonus payments, non-disclosure agreements and post-termination restrictions. The short-form answers then sign-post the reader to more detailed guides.
If you can’t find an answer to your question quickly and easily, email us, leave a comment, or call, and a solicitor respond, for free, and do their best to help you.
Contents
Detailed Guidance and FAQs
1. What is a settlement agreement?
A Settlement Agreement is a legally binding contract between an employee and their employer that sets out the terms of the employee’s departure from the company. The agreement is usually offered when an employer wants to terminate the employment contract on mutually agreed terms with the employee to avoid the possibility of the employee taking legal action in a tribunal or court for more money. In exchange, the employee receives a severance payment from the employer.
2. Why do I need a solicitor?
It is an important legal requirement that a qualified Settlement Agreement adviser, usually A solicitor, will need to sign off on the agreement to make it legally binding. The solicitor will advise the employee on the terms and the effect of the agreement, and if required, the merits of case and the amount of money they would be likely to receive at an Employment Tribunal.
3. Who pays for the employee’s solicitor?
The cost of a Settlement Agreement will vary depending on the complexity of the agreement and the amount of time the solicitor spends on the case. The employee is responsible for paying the solicitor’s fees, but the employer may cover some or all of these fees as part of the agreement.
Typically employers contribution towards the costs of advice is between £250-£500 ex VAT but in complex cases it may be more. While some solicitors may charge you more than the employer’s contribution, meaning you end up paying the shortfall, we guarantee to limit our charges at the level your employer agrees to contribute, for advising you on the terms and effect of the settlement agreement.
4. Why do employers ask employees to sign a settlement agreement?
Usually, the answer is a combination of wanting to move quickly and remove the risk of a costly dispute. For example, a fair performance improvement process may take months whereas as settlement agreement can be completed in days. It is also an exchange mechanism – i.e. the employee gets some extra money, such as an enhanced redundancy package, and in exchange the employer secures an effective guarantee the employee won’t bring any claims.
5. Will I get a job reference if I sign a settlement agreement?
Usually, employers will agree to provide at least a factual neutral reference but sometimes you can secure a more detailed positive reference, with the full agreed reference wording contained in an appendix or schedule to the settlement agreement, so you know exactly what your employer will send a prospective new employer on request.
6. Is the Settlement Payment tax-free?
The tax implications of a settlement agreement differ for each kind of payment and the circumstances. Any wages, holiday pay and notice pay you are entitled to are subject to deductions for income tax and employee national insurance. Termination payments (including any redundancy payment) can usually be paid tax-free up to £30,000, assuming your full notice pay is paid through the payroll and taxed.
7. What other main terms should I look out for?
The agreement should specify when your employment will end, how much you will get in notice pay, holiday pay, other entitlements, and termination payment. It should also say when you will receive the payments – usually this is between 14 and 28 days after your employment ends.
There will be a lots of legal jargon in the agreement. Your solicitor will walk you through the wording to ensure everything is clearly explained. Common clauses employees ask to change relate to:
- Missing or incorrect entitlements – pay, benefits and holidays. Do the math and don’t rely on your employer getting it right!
- One-sided clauses – for example, you agreeing not to say anything negative about your employer but no clause required the same or similar from the employer about you. Some employees are sanguine about this, others not so.
- Post-termination restrictions – these are sometimes inserted into a settlement agreement even though no previous restrictions were contained in the employment contract. There may be room to negotiate these out completely or limit their scope.
- References – either no provision is made for a reference, or the employee wishes to secure a more detailed favourable reference.
Often an employee will be happy with the settlement agreement wording as it is, and the agreement can be signed-off by the employees solicitor and returned to the employer. The whole process can therefore be turned-around the same day, with a call or video meeting with the solicitor and the final document emailed to complete the process.
8. Am I likely to secure a better deal if I negotiate?
That really does depend. But if you think the deal is light, and you could do better, try this quick guide on how to calculate a settlement agreement.
9. What happens is an employee rejects a settlement offer?
Usually, this means the alternative path the employer laid out will be followed, whether that’s a redundancy consultation process, disciplinary procedure, capability procedure or grievance procedure, wherever that leads you. Importantly, the employee would still be able to bring claims against their employer in relation to any dismissal, discrimination or other complaints. From an employeees perspective, rejecting an an offer is a risky but potentially powerful step. Usually an employee will want to make a justifiable counter offer. Further reading: how to reject and counter.
10. Can I tell an employment tribunal about the offer?
If you reject the offer and there is no binding agreement , then it depends on the circumstances (I know, that’s not helpful) but this topic warrants a more detailed deep dive article you can read here: Without Prejudice rule and protected conversations’. Bering able to argue the settlement agreement offer is admissible in any future tribunal may give an employee leverage to achieve a better financial severance payment. Further reading: is the settlement offer admissible in a tribunal claim?
11. My employer is threatening to dismiss me if I don’t sign, what can I do?
You may decide to raise a grievance but before you do that you may want to speak to a solicitor. This quick questionnaire takes 2 minute to complete and may also will help you decide if you have a valid grievance about the way the settlement agreement offer was made: Should I raise a grievance?
12. Can an employee initiate a settlement agreement offer?
Yes, they can. Further reading: making a settlement agreement offer.
Conclusion
In conclusion, a Settlement Agreement is a legally binding agreement that outlines the terms of an employee’s departure from a company. It is usually offered by an employer to avoid the possibility of the employee taking legal action in a tribunal or court for more money. It is important to seek the advice of a specialist Settlement Agreement solicitor before signing the agreement to ensure that the terms and conditions are fair and reasonable.
If that’s about all you take, or need, you can sign off from this guide and consider whether its time to pick up the phone to a friendly, professional specialist employment solicitor. Alternatively, if you have already found a solicitor to help you, I wish you good luck and the best. If you found this website helpful, please leave a review here – it takes a couple of minutes and is really appreciated.
Oh, you’re still here… That must mean you’re in the deep-dive (learning mode) camp. Brilliant, now its time to get into the detail. The alphabetical list below should sign-post you to the articles of interest.
We’ve also developed sector specifc settlement agreement guidance where there’s specific statutory and/or regulatory framework, for example: education and teaching, NHS, financial services /banking, and law firms / solicitors.
More Reading
Breach of Settlement Agreement
Calculators – how is a settlement payment calculated by employers?
Case Law (key legal authorities, i.e. cases, on settlement agreements)
Common Types of Employment Claims (inc. Unfair Dismissal, Discrimination and others)
Company Cars
Confidentiality, Non-Disclosure Agreements and Non-Derogatory comments clauses
Defective Settlements – what are the minimum requirements for a valid agreement?
Data Protection Complaints and Claims (inc. Subject Access Requests).
Entire Agreement Clauses – usually found at the end of the agreement, what’s the point?
Excluded Claims – what claims cannot be legally settled – even by a signed agreement?
Ex-gratia Payments – what are they?
Fraud – what happens if one party deliberately misleads the other into signing?
Gross Misconduct
Mental Health and fitness to sign a settlement agreement
Outplacement
Pensions and settlements
Performance Improvement Plans
PILON – Payment in Lieu of Notice – what is it and does it work?
Post-Employment Notice Pay
Protected Conversations (Section 1 of the Employment Rights Act 1996).
Qualified Indepdent Legal Advisers (full list of persons that can advise on a settlement agreement)
Redundancy Entitlements and Pay
Repayment of Termination Payments
Restrictive Covenants
Retirement – special considerations including taxation.
Reviews – read our client testimonials and reviews.
Warranties and Indemnities in Settlement Agreements
Whistleblowing – Rights to ‘blow the whistle’ appropriately cannot be stopped by a settlement agreement
Without Prejudice and Subject to Contract
Voiding the agreement – in what circumstances can a settlement agreement be withdrawn or treated as no longer binding?
