A Basic Guide to Settlement Agreements

In the current economic climate, with the continual drive for profit, staff cuts are often the quickest way for companies to reduce their overheads.  If you find yourself in a redundancy situation or in dispute with your employer, you could be handed a Settlement Agreement as you are ushered to the door.

As an employee you are entitled to all manner of statutory protection in the work place, such as under the Employment Rights Act 1996, the Sex Discrimination Act 1975 and the Race Relations Act 1976.  The law also recognises the imbalance in the bargaining position as between employers and employees and therefore prevents employees from simply signing away their statutory rights.  There are three ways in which an employer and employee can come to an agreement so that all claims and counterclaims between the parties are full and final:

  1. by way of a decision of an Employment Tribunal.
  2. by a settlement reached and approved with the help of ACAS
  3. by way of a “Settlement Agreement”.

Settlement Agreements

In order for a Settlement Agreement to be valid:

  • the Agreement must be in writing and must specify exactly what rights the employee is giving up.
  • the employee must receive legal advice from an independent Solicitor, as to the terms and effect of the Agreement.
  • the independent Solicitor must be identified in the Agreement and must have an insurance or Indemnity Policy that will cover any losses that could arise as a result of their advice. Previously this advice could only be obtained from a qualified lawyer. This has now been extended to certain other categories of person but we strongly advise you to contact a Solicitor with experience of examining and negotiating the terms of such agreements to ensure that your employer is not short-changing you on any final settlement.

Due to the strict requirements described above, it is usual for the employer to pay the first £250.00 – £350.00 plus VAT of the employee’s fees for legal advice.  However, if there is a dispute as to the terms of the Agreement and further negotiations ensue with the employer, these are best dealt with by your Solicitor and this may increase the costs for which you will be liable.


A Settlement Agreement will normally take the following format:-

  • It will include a definition of the employer, the scope of its company and its subsidiaries.
  • It will include the “severance terms” including the date of your appointment and the date of your termination.
  • It will also state what payments the employer will make to you, such as your salary, benefits, any outstanding holiday due, the final settlement sum, outplacement services provided, legal expenses, reasonable expenses and any discretionary bonus that may be due.
  • The Agreement will then normally set out that you the employee accept these sums in full and final settlement of any claims you may have that are detailed in the Agreement.  Each of these claims have to be clearly set out.  However, there are two claims that you the employee do not normally sign away.  These are any pension rights you may have that have accrued during your employment and any potential personal injury claim you may have against the employer.
  • The Agreement will include a paragraph relating to the return of employer’s property.
  • There are also normally a series of undertakings that you will have to make to the employer.  These will usually include a “gagging clause” preventing you from discussing the employer in a detrimental manner or approaching the media about any practices the employer has.
  • There will also be implied terms which may or may not be specified in your contract.  These will prevent you from revealing any trade secrets about the employer and the work practices.
  • Some employers will also include a series of restrictive covenants preventing you from working for a competitor.  Any such restrictive covenants must be reasonable or else they will not be upheld in a Tribunal.
  • There may also be a section on references in the Agreement.  You must be sure that you are happy with the reference being offered by the employer before you sign the Settlement Agreement.
  • There is a £30,000 tax exemption available for all severance payments meaning that the first £30,000 is tax free.  Nevertheless, most agreements will contain a section on tax indemnity.  This is because any payments made under a contract of employment are taxable.  Therefore, if in your original contract of employment you have a ‘pay in lieu of notice’ clause (PILON) the Inland Revenue may regard the proportion of your compensatory award that is equivalent to the sum which would have been received for pay in lieu of notice as taxable.  The Revenue’s current position in this regard is that if the settlement figure is basically equivalent to a payment the employee would have received under their contractual PILON clause, it is likely to be viewed as taxable.
  • Finally, there will be a section which confirms that you have received independent legal advice, specifying who that legal advice was received from and that you agree that the conditions relating to the Settlement Agreement under the Employment Rights Act and various other statues have been satisfied.

Due to the finality of Settlement Agreements, it is essential that you fully understand all the terms to which you are agreeing.  You may be signing away the opportunity to pursue your employer for a valid claim for unfair dismissal or wrongful dismissal.  In the alternative, you may simply wish to negotiate more favourable exit terms.

The importance of good legal advice cannot be overstated and in this regard. Stafford Young Jones and our Employment Team will be happy to assist you.