What is a settlement agreement: A Guide for Employees

It is important for employees to understand their rights, particularly in the current climate, in relation to disputes in the work place and redundancy situations. We have experienced employment law solicitors who are available to advise employees on all aspects of their employment and we have particular expertise in dealing with Settlement Agreements.

1. What is a Settlement Agreement?

Compromise Agreements have been around for many years and have often been utilised by employers to bring an end to a contract of employment. In July 2013 Compromise Agreements became known as Settlement Agreements, and whilst some changes were made (for example, a Settlement Agreement does not necessarily have to state that it is made in settlement of a dispute whilst this was an essential feature of Compromise Agreements) the same principles generally apply.

The law states that an individual cannot contract out of their employment rights, but there is an exception to this rule where a settlement is reached by way of a Settlement Agreement.

A Settlement Agreement is a legally binding agreement between an employer and employee used to set out the terms and conditions reached when a contract of employment is to be terminated or a dispute is to be resolved. It is essential that you fully understand your employment rights before contracting out of them so you are required by law to obtain legal advice from a qualified legal adviser, such as a solicitor, before signing a Settlement Agreement. At Allan Janes, we have qualified employment law specialists with the experience and insurance cover required to advise on all aspects of Settlement Agreements.

Settlement Agreements can be used in a number of circumstances, including redundancy, dismissal, or settlement of an Employment Tribunal claim. Perhaps the most common use is in redundancy situations where it minimises the risk of complications and concludes the employment contract unequivocally with agreement by both parties.

2. Why is a Settlement Agreement Necessary?

If, when making redundancies, your employer has failed to comply with the relevant laws, it is normally open to you to make a claim to the Employment Tribunal that the dismissal was unfair, potentially resulting in compensation or even in reinstatement. As a result, employers are now increasingly using Settlement Agreements to prevent employees from making claims after they have been made redundant. Settlement Agreements can also be used in the settlement of any dispute or matter relating to your employment and, in this situation, it has the same effect of giving you certainty and closure.

By entering into a Settlement Agreement you are signing away your right to make a future claim against your employer and thus turning a redundancy package, or claim, into a full and final settlement of any potential claims. You will therefore want to make sure the Settlement Agreement adequately compensates you for any potential claims as well as ensuring that any outstanding wages, bonuses and accrued but untaken holiday pay is provided for in the Agreement.

We will examine your Settlement Agreement to check whether all payments and benefits you are entitled to are incorporated into the settlement. If required, we will also advise you on the merit and value of any potential claim you may have against your employer.

The Settlement Agreement can also benefit you because it is usually the quickest and most cost effective means of reaching a settlement and it gives you the certainty of knowing that you will receive a specified sum from your employer by way of compensation. It reduces the obvious stress involved in a redundancy situation or workplace dispute and also avoids the risk of a potential claim being unsuccessful.

3. What will a Settlement Agreement contain?

In order to be legally binding, a Settlement Agreement must:
– be in writing;
– relate to a “particular complaint” or “particular proceedings”;
– only be made where the employee has received advice from a relevant independent adviser as to the terms and effect of the proposed agreement and its effect on their ability to pursue any rights before an Employment Tribunal. The legal adviser must have the required insurance in place;
– Identify the independent adviser;
– State that the conditions regulating Settlement Agreements under the relevant statutory provisions are satisfied.

The Agreement should set out a full breakdown of any payments you are receiving and the extent to which those sums will be paid free of tax. Usually up to £30,000 compensation can be paid without deduction of tax and national insurance, but it is common practice to give a tax indemnity to your employer within the Agreement in exchange.

The Agreement will often also provide for confidentiality both in terms of your employer’s trade secrets and business affairs and also as to the terms of the Agreement.

Where an Agreement states that it is in settlement of a dispute, it is likely to contain a comprehensive list of Statutes under which you will agree not to bring a claim. We will go through your Agreement with you to ensure that all the relevant conditions listed above are met (so that the Agreement is legally binding).

4. Why do I need legal advice on a Settlement Agreement?

The law states that a Settlement Agreement is only valid if the employee has obtained legal advice (this requirement cannot be waived in any circumstances). This is to protect you from signing away your employment rights without properly understanding the consequences. Settlement Agreements can be complex and may contain legalistic language, so it is vital that you obtain professional advice to ensure your full understanding of the effect of the Agreement. Usually the Settlement Agreement will make provision for your employer to pay your legal expenses up to a fixed sum. We can negotiate an increase in that figure where appropriate.

As a result of our advice, you may want us to attempt to negotiate an improved settlement package for you which we are experienced in doing. Factors we will consider here include the number of years you have worked for your employer, your salary and job title, and where relevant, the reason for the termination.

5. Will I have to pay tax on the amount received?

Compensation received under a Settlement Agreement can be paid tax-free up to £30,000. The general rule of thumb is that payments due in accordance with your contract of employment are taxable and ex-gratia payments (i.e. compensation for a potential claim) are not. In addition, benefits such as continued use of mobile phone or company car are usually tax-free. Essentially it depends on the circumstances, and this is where Allan Janes’ expertise in this area can be of great assistance.

6. Do I have to agree to a Settlement Agreement?

In order to encourage you to sign your employer will normally enhance the amount you are to receive, over and above the statutory and contractual minimum.

There is no legal or other obligation on you to sign a Settlement Agreement if you are not happy with it. Your refusal to sign would mean that there is no agreement between you and your employer and you would maintain your right to pursue an employment related claim in the Employment Tribunal (which must be initiated by formally notifying ACAS of the claim(s) within 3 months of the complaint).

However, in many cases your refusal to sign a Settlement Agreement could mean that your employer refuses to pay the sum offered in the Agreement, e.g. the enhanced package, and instead pays only the minimum statutory/contractual entitlement. You should therefore consider carefully whether the outcome of a potential claim in the Tribunal is likely to exceed what you would have received under the Settlement Agreement, taking into account that you are unlikely to recover any costs in the Tribunal.

If you are not satisfied with the contents of your Settlement Agreement, we would seek to negotiate improved terms for you. In negotiating the terms of the Agreement we are free to suggest amendments and to attempt to increase the settlement sum.

7. What claims will I be able to make once an Agreement is signed?

If you sign a Settlement Agreement, you will generally only be able to make three types of claim:

1. If the claim is to enforce the terms of the Agreement;
2. If the claim is in respect of personal injury which you were not aware of and could not reasonably be expected to be aware at the date of the Agreement;
3. If the claim relates to accrued pension rights.

Should the situation arise where you feel that you would need to make a claim in the above terms, we have experience in dealing with such disputes and would be happy to discuss your concerns with you.

8. Will a Settlement Agreement affect my reference?

There is generally no legal obligation on an employer to provide a reference, but any reference that is provided should be true, accurate and fair. If not, the employer may be guilty of misrepresentation. It is usually a good idea to incorporate a reference into a Settlement Agreement (for certainty’s sake), in which case the reference becomes part of the Agreement. We would be happy to draft an appropriate reference for you, for inclusion in the Agreement.

9. Who pays for the legal advice required for a Settlement Agreement?

The vast majority of employers offer their employees a contribution towards legal fees which is sufficient to cover the costs of the required legal advice. However, Settlement Agreements are not always straightforward and in those cases where extensive negotiations are required to achieve a satisfactory settlement, we can attempt to negotiate an increased contribution to the legal fees from your employer. If this is not possible, you may be required to meet the costs in excess of your employer’s contribution if you wish to pursue further negotiations. However, the increased recovery is likely to more than cover those additional costs.

If you have any queries about settlement agreements or any other employment related query, please get in touch with Charlotte Braham in the Employment Department on 01494 893529.


“I am so glad I found you as my solicitor”

Mrs. C Wills and Probate Client