Settlement Agreement FAQs

A Settlement Agreement is the formal name given to a termination agreement between an employer and an employee. It was previously known as a Compromise Agreement.

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The effect of you signing a Settlement Agreement is that in exchange for the termination payment and any other benefits which your employer agrees to give you, you will be giving up most, if not all, of your employment related legal rights. This means that you would not be able to bring an unfair or wrongful dismissal claim, any form of discrimination claim or other claim for breach of contract or loss of pay or benefits . The only claims that are normally (although not always) excluded from the scope of a Settlement Agreement are future claims in respect of personal injury and accrued pension rights.

Settlement agreements nearly always cover termination of employment although occasionally they can arise in circumstances where the employment is ongoing. A Settlement agreement can be used in situations such as:

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• Where there is, or is threatened to be, a legal dispute between the employer and the employee and the employer is prepared to pay some compensation to the employee to settle or prevent the claim being pursued in the Employment Tribunal.

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• Where the employee is being made redundant and the employer is offering an additional or enhanced payment over and above statutory or contractual entitlements

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• Where there is a difficult situation in the workplace or things are just ‘not working out’ and the employer and the employee are able to agree mutually acceptable severance terms to resolve the matter. (This discussion might have been described as a ‘Protected conversation’ or ‘Confidential settlement negotiations’).

Settlement Agreements do not always look like a formal legal document and they do not even have to bear the words “Settlement Agreement”. Yours might be called a “Severance Agreement” or “Termination Agreement”. Alternatively it may just be in the form of a letter. The things to look out for are references to:

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• A requirement to take legal advice

• Section 111A of the Employment Rights Act 1996

• Names of Acts of Parliament and your right to go to an Employment Tribunal

If you are unsure whether you have a Settlement Agreement, please contact us and ask for our assistance.

It’s true that the employer draws up the agreement and therefore has control over the terms that go in it, but the employee is protected by the requirement that he or she must receive independent legal advice, normally from a solicitor. If we think the terms are unreasonably weighted against you, we can help you negotiate with your employer to improve them.

The legal role of the solicitor is to advise you on your legal rights, particularly your right to bring an unfair dismissal claim, so that you understand exactly what you are giving up by signing the Agreement. But our service goes further than that. If your employer is not honouring all your entitlements or we do not think the compensation being offered is sufficient to justify you giving up your legal rights, we can negotiate on your behalf or equip you with the arguments to get a better package.

Yes, even if you are entirely happy with the terms, you do. Without independent legal advice your agreement is not binding. Your employer could fail to pay you and you would not be able to do anything about it. We will provide you with a certificate or letter signed by our Solicitor to confirm that you have received legal advice.

No! As a rule of thumb you can receive a termination payment of up to £30,000 tax free. However, this does not apply to pay in lieu of notice or payments arising out of your contract such as salary, bonuses, payment in lieu of annual leave or other benefits. When we advise you on your agreement we will also be checking the tax status of the payments.

No – not at all. It can include a whole range of terms that cover return or retention of property, confidentiality and possibly restrictions on what work you can do after termination of your employment. It is also often possible to agree wording for a reference. This is why it is so important for you to get advice not just from any Solicitor, but from one who is a specialist in employment law and experienced in dealing with Settlement Agreements.

More commonly it is the Employer who proposes a Settlement Agreement, however, if you have a situation at work which you think may only be resolved by you leaving, we can advise you how to instigate a protected conversation, or we may be able to negotiate a Settlement Agreement for you

Your employer may set a deadline for signing your settlement agreement but you should be given at least 10 days to think about the offer and obtain advice before signing.