A settlement agreement is a legal contract between you and your employer. Normally this agreement is made when your employer wants to end your employment, but also prevent you from making a future claim against them. In return for signing, you’d usually receive financial compensation.
You’ll probably have to agree to keep the details of the agreement – and the circumstances that led to it – confidential, with some exceptions. Your employer may also want to stop you from doing things like working for competitors or taking customers with you (sometimes called “restrictive covenants”).
If your employer is offering you a settlement agreement, we know that you’ll have lots of questions. Our employment lawyers have answered the common ones below, but please contact us if your question isn’t covered.
In This Guide:
If you’d like to speak to one of our experienced team about your case, please call us on 0207 650 3939.
Why Might An Employer Offer You A Settlement Agreement?
Your employer might offer a settlement agreement to you if they want to end your employment but also:
- Not follow the usual disciplinary or redundancy procedure
- Keep the details of your dispute and/or departure confidential
- Protect against you making a claim in the future through the Employment Tribunal or courts.
In some cases you may be offered a settlement agreement, but still continue working for your employer. In these cases it’s usually because your employer wants to make sure that a particular issue has been sorted out, and won’t re-emerge later.
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Do You Need To Use A Solicitor?
For a settlement agreement to be valid, you’ll need to get independent legal advice from a solicitor or another qualified person. This is because signing a settlement agreement will mean that you’re giving up the right to make a future claim against your employer. In many cases your employer will pay some or all of these legal costs as part of the agreement.
At a basic level a solicitor will explain to you what the agreement means. They can also advise you on:
- Whether it’s in your interests to sign the agreement at all
- Whether the terms of the agreement are too restrictive or if they’re reasonable
- The rights that you’re giving up by signing the agreement
- Whether the amount of compensation you’re being offered is fair.
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Should You Accept A Settlement Agreement?
It’s important that you take the time to consider your employer’s offer, and that you get independent legal advice. Your employer shouldn’t pressure you into signing an agreement. The “ACAS code of practice on settlement agreements” suggests a minimum of 10 calendar days for you to consider the agreement.
There are pros and cons to accepting the terms of a settlement agreement. This is where discussing your case with an employment solicitor can be extremely helpful. They can give you an expert opinion on:
- Whether the compensation and terms offered in the settlement agreement are fair
- What your other options are
- The potential impact of those options in terms of your reputation and career
- How likely you’d be to win your case, if you didn’t sign the agreement and took your dispute to an Employment Tribunal instead
- How much compensation you might expect, if you took your dispute to an Employment Tribunal.
Whether the benefits outweigh any other concerns you have will depend on your individual situation. You might value settling with your employer for a little less than you might have got at Tribunal for example, if it means that you can put the incident behind you sooner.
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What Should Be Included In A Settlement Agreement?
Settlement agreements commonly include terms about:
- The amount of compensation you’ll receive
- The date your employment will end
- The notice period you’re entitled to and if you have to work your notice (or if a payment will be made to you instead)
- The claims you will not be able to bring in the future as a result of signing the agreement
- Any claims you could still bring against your employer in the future
- Whether you need to follow any restrictions within your original employment contract (such as not working for a competitor)
- Any new restrictions within the agreement (for example keeping the details of it confidential)
- How much your employer will pay for you to get independent legal advice about the settlement agreement.
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Common Legal Jargon You’ll See In A Settlement Agreement
Ex-Gratia Payment
This is an extra payment that’s made to you by your employer, above what you’re entitled to in your employment contract. This payment usually goes some way to reflecting the compensation you may get if you took your case to an Employment Tribunal.
Representations Or Warranties
This means things that your employer has assumed to reach the settlement.
It’s common for “warranties” (or promises) from you to be included in the settlement agreement. This might include:
- Returning your employer’s property
- Returning confidential information and documents
- Confirming you haven’t received an offer of employment before signing (if you have it could affect the amount of compensation your employer is willing to pay)
- Confirming that you haven’t done anything, which your employer is not yet aware of, that would cause them to dismiss you.
You should read any warranties carefully with your solicitor. It’s important to be truthful. If your employer later finds out you weren’t, they may refuse to pay your compensation or ask you to pay it back.
Subject To Contract
This means that the settlement agreement isn’t legally binding until it has been signed by you, your employer and your solicitor/legal advisor.
Waiver
A waiver is where you give up the right to make a legal claim. In a settlement agreement it’s used to stop you making a later claim against your employer. The precise claims you won’t be able to make (and those you still can) should be set out in the agreement.
Without Prejudice
When you’re negotiating your settlement agreement, you may well see the term “without prejudice” appear. You’ll also see it on the settlement agreement itself.
Without prejudice means that, generally-speaking, the contents of a discussion (an email chain for instance), or your settlement agreement, can’t be used as evidence in a later legal claim.
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What’s A Reasonable Settlement Agreement?
It’s really only possible to answer that question with a full view of your case. An employment solicitor can tell you whether the compensation offered is reasonable. In doing this they should also give you an idea of how much you might get if you instead made a legal claim against your employer.
Solicitors specialising in settlement agreements are familiar with the various terms included in them. They’ll be able to tell you whether those terms are fair or too restrictive.
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What Should You Think About When Negotiating A Settlement Agreement?
If you want to negotiate the terms of your settlement agreement, it’s crucial to get independent legal advice. While you could negotiate this on your own, a solicitor will be able to help you understand what’s achievable, what’s not achievable and advise on the best negotiating tactics.
When negotiating the settlement it’s important to strike the right balance. Settlement agreements used to be called “compromise agreements”, so that gives you an idea of how the negotiation should be approached.
Some things you should consider when negotiating are:
- The compensation amount and how this compares to making a legal claim
- How the compensation amount will be taxed (you may need to get specific advice on this)
- How long the settlement agreement would take compared to an alternative such as going to the Employment Tribunal and the associated legal costs
- The impact of the agreement on your reputation and career prospects
- How restrictive other terms of the agreement are (such as preventing you working for a competitor)
- Making sure you get a fair and accurate written reference from your employer (in most cases employers aren’t legally obliged to give you a reference).
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Can You Back Out Of A Settlement Agreement?
No, generally speaking you can’t back out of a legally-binding settlement agreement.
However, you can back out of making the agreement with your employer at any point before the document is signed. This shouldn’t affect any future claim you make against your employer.
You may be able to back out of a signed agreement if your employer behaved improperly, such as putting pressure on you or rushing you to sign, although this can be harder to prove.
A settlement agreement is a legal contract, so to be enforceable the document needs to meet strict criteria. If it doesn’t then the agreement might not be valid.
If you think your settlement agreement may be invalid, you should contact an employment solicitor as soon as possible for specialist advice.
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What Happens If You Or Your Employer Breaches The Settlement Agreement?
If you or your employer breaches the agreement, then the case can be taken to the County Court. In certain circumstances, you may be able to take your case to an Employment Tribunal.
If the settlement agreement was offered during a tribunal hearing, then you may be able to move forward with your original claim.
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Do You Have To Pay Tax On Your Settlement?
Your settlement will be made up of a number of parts, some of which you might have to pay tax on. Please note that tax in this area can be complex and tax-free treatment can never be guaranteed. We recommend taking specialist advice on tax and pension matters.
Payments that will be taxable (and which national insurance may also need to be paid on):
- Outstanding salary payments and holiday pay
- Other earnings such as bonus or commission payments
- Non-cash benefits such as private medical insurance or use of a company car
- Payments set out in your employment contract that are made instead of serving a notice period, or payments made while on garden leave
- A payment for you to enter into certain restrictions in the settlement agreement, such as to not to work for a competitor.
Payments that can be made tax free include:
- Employer and employee contributions to your pension, subject to pension scheme rules and limits
- Your employer’s contribution to your legal costs in connection with the termination of your employment
- Payments made by your employer for you to retrain or for outplacement services in certain circumstances (outplacement services support you in re-entering the job market)
- Payments made because of a medical condition, injury or disability which has caused your employer to end your employment.
In addition the first £30,000 of the following payments may be made free of national insurance and tax (you may only benefit from one £30,000 tax free allowance for one period of employment):
- Ex-gratia payments (compensation payments that are over and above what’s set out in your employment contract)
- Redundancy pay.
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