Settlement Agreements for Employees

A settlement agreement is a legally binding contract between you and your employer or former employer. It is commonly used to record the terms on which employment will end or to resolve an existing workplace dispute.

You will usually receive compensation or other agreed benefits in return for agreeing not to bring specified employment claims. The agreement may also cover notice, holiday pay, references, confidentiality and restrictions that apply after your employment ends.

No. A settlement agreement is voluntary, and you are not required to accept or sign it simply because your employer has made an offer.

Before deciding, you should understand the proposed terms, the rights you would be giving up and what may happen if an agreement is not reached. We can explain your available options and the potential consequences of accepting or rejecting the offer.

For a settlement agreement to be legally binding, you must receive advice from an independent, appropriately qualified adviser on the terms and effect of the agreement and its impact on your ability to pursue the claims covered by it.

Your solicitor will explain what you are being asked to accept, identify any terms requiring clarification and complete the adviser’s certificate when the agreement is ready to be signed.

Employers commonly offer a contribution towards the cost of the independent advice required for a settlement agreement. The amount offered should be stated in the agreement.

In a straightforward case, the contribution may cover reviewing the agreement, advising you on its effect and completing the adviser’s certificate. Additional fees may apply if extensive negotiation or separate advice about a potential employment claim is required. We will explain the position before carrying out additional work.

Settlement agreement terms may be negotiable. Whether it is appropriate to request changes will depend on the circumstances, the reason for the proposed exit, the value of any potential employment claims and the offer already made.

Possible areas for negotiation include compensation, notice pay, the termination date, reference wording, confidentiality, post-employment restrictions and the contribution towards legal fees.

We will explain the available options without suggesting unnecessary negotiation that could delay an otherwise suitable agreement.

The payments will depend on your employment contract and the circumstances of your departure. An agreement may include:

• Salary owed up to the termination date
• Notice pay or payment in lieu of notice
• Payment for accrued but untaken holiday
• Bonus or commission where applicable
• Statutory or enhanced redundancy pay
• A separate compensation or termination payment
• Benefits, pension contributions or other agreed sums

We will check how each payment has been calculated and described within the agreement.

Different parts of a settlement payment can receive different tax treatment. Salary, holiday pay, bonus, commission and payments representing notice will generally be subject to Income Tax and National Insurance in the usual way.

The first combined £30,000 of certain qualifying termination payments may usually be paid without Income Tax, but the exemption does not apply automatically to every payment in an agreement. Amounts above the applicable threshold are normally taxable.

We will explain how the agreement describes the payments and flag any wording requiring clarification. Specialist tax advice may be needed where the arrangements are complex.

Yes. An agreed reference can form part of the settlement agreement. Ideally, the precise wording should be attached to the agreement, together with a commitment that future written references will be provided in substantially the agreed form.

You may also wish to agree how your departure will be communicated internally and what your employer will say in response to verbal reference requests.

A settlement agreement will identify the employment claims that you agree not to pursue. Depending on the circumstances, these may include claims relating to unfair dismissal, redundancy, discrimination, wages, holiday pay, breach of contract or other workplace matters.

The wording can be extensive. We will explain which claims are covered, whether any rights are preserved and the effect signing will have on any existing grievance, appeal or tribunal process.

Confidentiality clauses may restrict what you can say about the agreement, the payment, the circumstances leading to your departure or confidential business information.

These clauses should usually contain appropriate exceptions. For example, you may need to speak to close family members, professional advisers, HM Revenue & Customs, medical professionals, regulators or law-enforcement authorities.

Confidentiality wording cannot lawfully remove every right to make a protected disclosure or report criminal conduct. We will explain the scope of the particular clauses in your agreement.

Your existing employment contract may contain restrictive covenants dealing with competitors, clients, employees or confidential information. The settlement agreement may repeat, amend or introduce further restrictions.

We will identify the obligations that are intended to continue after termination and explain how they could affect your next role, business or professional activities.

If you do not sign, the proposed settlement will not normally take effect. Your employment may continue, or your employer may proceed through another process such as redundancy, capability, disciplinary action or dismissal, depending on the circumstances.

Rejecting an offer does not automatically mean that you will receive a better one. Before deciding, we can help you understand the strength of your position, the proposed financial package and the practical alternatives.

The timescale will depend on the length and complexity of the agreement, the advice required and solicitor availability. If your employer has set a signing deadline, send us the complete agreement as soon as possible.

We will let you know promptly whether we can assist within the available time. You should not sign until you have received independent advice and understand the terms.

Please provide the complete settlement agreement and tell us about any signing deadline. Where available and relevant, it may also be helpful to provide:

• Your employment contract
• The letter or email accompanying the offer
• Recent payslips
• Bonus or commission information
• Relevant grievance, redundancy or dismissal correspondence
• Details of any ongoing workplace dispute
• Your preferred reference wording

If you do not have every document, contact us with the agreement you have and we will explain what else may be required.