When an employment relationship terminates, it is crucial that both parties are aware of their legal rights and obligations. Settlement agreements can be used in a wide variety of situations to terminate the employment relationship and will normally require the employee to waive all possible claims against the employer in exchange for an enhanced financial package. Initial discussions relating to the offer of a settlement agreement will usually be inadmissible provided the employer complies with minimum legal requirements.

To be legally enforceable a settlement agreement must require the employee to obtain independent legal advice on its terms.

We can advise employers and employees on all aspects of the settlement agreement process including the initial offer stage, drafting the settlement agreement and advising upon the terms. Where negotiation on the terms of a settlement agreement is required, we can deal with the negotiations on your behalf to ensure a fair settlement is reached.

Where a business is planning on making a number of employees redundant, they may offer settlement agreement terms. We can advise both employers and employees on large scale settlement agreement programmes. Where engaged to advise employee groups, we can consult with employee representatives and employers on standard terms being offered to minimise individual negotiations and can attend the place of work to conduct individual consultation meetings. This ensures a consistent level of advice and a streamlining of the process. We have advised on large scale settlement agreement programmes for employees of large companies across Hertfordshire, Essex and Thames Valley involving groups of 10-150+ employees.

If you are an employee looking for advice on a settlement agreement, you may find our frequently asked questions below useful. 

A settlement agreement is a way of resolving a dispute between an employee and their employer – for example, about redundancy, misconduct, capability or harassment. The employee signs a legally binding contract agreeing to terminate their employment and accept a severance payment. In return, they waive their rights to claim compensation from the employer. To be valid, a settlement agreement must be made in writing and relate to a particular complaint or proceedings. The employee must also have received independent legal advice on the matter. The document will be marked “without prejudice and subject to contract”. This means it can’t be referred to in any future legal proceedings and is only binding when signed by both parties.

This means the conversation can’t be admitted as evidence in Court or Tribunal proceedings if it’s a genuine attempt by your employer to settle the dispute.

Unlike the “without prejudice” rule, a protected conversation can be started even if your employer hasn’t previously raised any formal workplace issues with you. A protected conversation isn’t admissible in most unfair dismissal legal proceedings. But it could be so if your employer has behaved improperly – for example, if they’ve threatened to sack you if you don’t accept a severance pay offer.

It’s likely your employer will offer to contribute to your legal fees, and this should be stated in the agreement itself. In this case, it’s almost certain that they’ll pay us directly. But as we’re providing our services to you, we’ll address our VAT invoice to you and you’re ultimately responsible for paying our fees. It’s important to note that your employer’s contribution is to allow you to be advised on the effect of the settlement agreement. It doesn’t cover the cost of advice on whether the severance sum is fair, or any negotiations on the agreement. If you fail to sign the agreement for any reason, then your employer won’t be obliged to settle any of your fees.

Yes, we can advise you on any potential financial claims you may have against your employer. We can then compare the value of these to the sum offered to you in the settlement agreement. If we believe your settlement offer is less than the value of any claims you may have, we can negotiate on your behalf to increase it. But depending on your employer’s fee contribution, you may incur extra charges for us to do this. In this case, we’ll discuss different payment options with you to find the one that best fits your circumstances. For example, one option could be a fixed fee so you’ll know in advance exactly how much you’ll need to pay. We’ll also seek to increase any employer contribution as far as possible.

The first £30,000 of your ex gratia (goodwill) settlement payment is usually free of tax and national insurance deductions. But your tax liability depends on the exact nature of the severance package. For example, any part which compensates you for salary earned, notice pay, and accrued holiday are subject to tax and national insurance deductions in the normal way. Any ex gratia payment in excess of £30,000 will be taxed at your top rate of tax.

It’s usual for any restrictive covenants in your employment contract to remain in force after the settlement agreement has been signed. For example, you might be prevented from approaching your former employer’s clients for a certain period of time. Negotiating a “watering down” of such restrictions so you can more easily find another job may be something you ask us to negotiate for you.

The main reason for your employer to enter a settlement agreement is to prevent you from making any compensation claims against them. That means it’s usual for such agreements to include a waiver of most employment-related claims. But it’s also common for settlement agreements to clearly “carve out” of that waiver the right for you to bring about certain claims. For example, these could be related to personal injury (if you’re not aware of an injury at the point of signing), accrued pension rights, and enforcement of the settlement agreement itself.

You should keep your settlement discussions confidential wherever possible. Though most agreements envisage that you’ll discuss the offer/agreement with your close family and professional advisers, you should avoid discussing it with colleagues as this could breach the terms.

Once you’ve had legal advice and signed the agreement, it becomes a legally binding document. You can’t change your mind once a copy of your signed agreement has been sent to your employer. However, you’re under no obligation to accept a draft agreement and can change your mind at any point before signing. Equally, a draft agreement can be withdrawn at any time by the employer before both parties have signed it. We’ll support you to make an informed decision about either accepting or rejecting the settlement agreement.

When you book your appointment, we’ll tell you what you should bring according to your specific circumstances. But as a general rule, we’d like to see a copy of the draft settlement agreement as a minimum. It’s also useful if you can give us a copy of your employment contract and any other contractual documents, e.g. entitlement to a bonus or share scheme. And if your matter relates to a workplace dispute (grievance or disciplinary), a copy of the employer’s disciplinary & grievance policy and any supporting correspondence/documentation would be helpful. In addition, you’ll need to bring along two forms if ID if you haven’t used the firm before.

Our employment solicitors are based at our St Albans office. To find out more and book an appointment, ring 01727 837161 or email lawyers@debenhamsottaway.co.uk

Settlement Agreements news