Settlement Agreements

A settlement agreement is a legally binding written contract between an employer and an employee or former employee. The employee usually agrees not to pursue specified employment claims in return for an agreed payment or other benefits.

Settlement agreements are commonly used to bring employment to an end on agreed terms, resolve an existing workplace dispute or provide certainty following a redundancy, performance, conduct or capability process.

An employer might consider a settlement agreement where both parties are willing to explore an agreed resolution. This could include:

• Managing an agreed employee departure
• Resolving a grievance or workplace dispute
• Concluding a redundancy situation
• Addressing performance, capability or conduct concerns
• Settling an existing or potential employment claim
• Agreeing terms following a breakdown in the working relationship

A settlement agreement will not be appropriate in every situation. We can advise on the available options before you approach the employee.

Taking advice before beginning a settlement conversation can help you understand the legal and commercial risks, decide whether an agreement is appropriate and establish suitable proposed terms.

It is particularly important to consider whether there may be allegations involving discrimination, whistleblowing, automatic unfair dismissal or another claim for which the usual protections surrounding settlement discussions may not apply.

The conversation should be handled carefully and without improper pressure. The employee should understand that the proposal is voluntary and that they are not required to accept it.

The reasons for the proposed agreement, the main terms and the alternative process should be explained clearly. Employers should avoid presenting the employee with a predetermined dismissal or threatening adverse consequences if the offer is rejected.

We can help prepare the initial proposal, provide a conversation script and advise the appropriate people within your organisation on how to conduct the discussion.

Settlement discussions may sometimes be protected by the “without prejudice” principle or section 111A of the Employment Rights Act 1996, but the protection is not automatic or unlimited.

Section 111A can prevent certain pre-termination negotiations from being used as evidence in an ordinary unfair dismissal claim. It does not necessarily protect discussions relating to claims such as discrimination, whistleblowing, breach of contract or automatic unfair dismissal.

Improper behaviour, including undue pressure, intimidation or discrimination, can also affect the protection available. Legal advice should therefore be obtained before beginning the conversation.

The employee should be given a reasonable period to consider the written terms and obtain independent legal advice.

The Acas Code of Practice recommends allowing at least 10 calendar days to consider the proposed formal written terms unless the parties agree otherwise. A shorter period may be appropriate in some circumstances, but employers should avoid placing the employee under undue pressure.

Yes. For a settlement agreement to validly waive the relevant statutory employment claims, the employee must receive advice from an independent and appropriately qualified adviser on the terms and effect of the agreement.

The employee cannot be advised by the solicitor acting for the employer. Their adviser will usually sign a certificate confirming that the required advice has been provided.

Employers commonly offer a contribution towards the cost of the employee obtaining the independent legal advice required for the agreement. The amount should be stated clearly in the document.

The contribution may cover advice on a straightforward agreement and completion of the adviser’s certificate. If substantial negotiation or separate advice about an employment claim is required, the employee may need to meet the additional cost unless a higher contribution is agreed.

The appropriate terms will depend on the circumstances, but an agreement may address:

• The termination date
• Salary and other contractual payments owed
• Notice or payment in lieu of notice
• Accrued but untaken holiday
• Bonus and commission payments
• Redundancy and compensation payments
• Benefits and pension arrangements
• The tax treatment of payments
• An agreed employment reference
• Confidentiality and non-disparagement provisions
• Post-termination restrictions
• Return of company property and information
• The employment claims being waived
• Legal-fee contributions and payment deadlines

We can draft the agreement around the particular circumstances and risks involved.

The tax treatment depends on the nature of each payment. Salary, holiday pay, bonuses, commission and payments relating to notice are generally subject to Income Tax and National Insurance in the usual way.

Some qualifying termination payments may fall within the £30,000 Income Tax exemption, but this does not apply to every payment made under an agreement. Amounts above the applicable exemption may also create an employer National Insurance liability.

The agreement should identify the different payments and their intended tax treatment. Specialist tax or accountancy advice may be required in more complex cases.

Yes. A settlement agreement is voluntary, and the employee or their adviser may propose changes before it is signed.

Negotiations commonly concern compensation, notice pay, the termination date, reference wording, confidentiality provisions and post-employment restrictions.

We can conduct negotiations on your behalf, advise whether proposed changes are reasonable and help protect your organisation’s commercial position.

Depending on the circumstances, the agreement may include:

• A waiver of specified employment claims
• Confidentiality obligations
• Mutual or employee non-disparagement provisions
• Protection of confidential information and intellectual property
• Confirmation that company property has been returned
• Continuing or revised restrictive covenants
• Warranties concerning undisclosed claims or misconduct
• Repayment provisions where appropriate and enforceable

Confidentiality wording should not seek to prevent lawful protected disclosures, reporting criminal conduct, cooperating with regulators or making other disclosures protected by law.

An employee cannot be forced to enter into a settlement agreement. If the offer is rejected, the employment relationship continues unless it ends through another lawful process.

Depending on the circumstances, the employer may need to continue with an appropriate redundancy, capability, disciplinary, grievance or absence-management procedure. Rejecting an offer should not itself result in retaliation or predetermined dismissal.

We can advise on the next steps and help ensure that any subsequent process is handled fairly.

To help us understand the situation and prepare suitable advice, please provide:

• The employee’s contract and relevant policies
• A summary of the circumstances leading to the proposal
• Details of any grievance, disciplinary or redundancy process
• Relevant correspondence and meeting notes
• The employee’s salary, notice period and benefits
• Details of any potential employment claims
• The proposed termination date and payments
• Any required confidentiality, reference or restriction terms
• The proposed timetable for the process

If the situation is urgent, let us know the relevant deadline when contacting the team.