Settlement Agreements for Employees

A Settlement Agreement is a contract which - in exchange for a sum of money - will typically prevent an employee bringing any claim against their employer. Its purpose is to bring finality to the parties so that the employee leaves with an additional sum of money and the employer has a guarantee no further claims can be brought against it. There are a few exceptions to this but essentially a Settlement Agreement will close down all future claims by the employee.

Settlement Agreements are ineffective unless the employee has received independent legal advice concerning their terms and effects. That advice can come from a solicitor or a trade union representative but there is an obligation upon the employer to ensure the employee takes independent legal advice.

There is usually no cost to the employee. Employers will always make a contribution to the employee’s costs of obtaining independent legal advice. These costs will range from at least £250 plus VAT up to £500 plus VAT. Sometimes it is necessary for the employee to see a solicitor twice (if there is a long gap between the date they are signing the agreement and the date their employment ends) but those costs are usually covered by the employer.

Both the employer and employee want to have certainty moving forward. Whilst each case is different, the motivation for each employee can be different too. It may be a simple case of wanting some additional money or it may be the necessity to obtain a good reference. 

We set out some examples below:

• It may be that the employer is unsatisfied with the employee’s work and finds their performance inadequate. Rather than going down an improvement process it may opt for the employee to go quietly via a Settlement Agreement. This will inevitably mean a payment to the employee and usually a basic reference. This allows the employee to leave on agreed terms and allows the employer to avoid the time and cost of putting improvement strategies into place for the employee.
• If the position has become redundant, it is open to the employer to offer a Settlement Agreement. The employee will be entitled to their notice period plus statutory redundancy at a minimum if they have over two years’ service (but may receive more if there is contractual entitlement to enhance redundancy under the terms of their contract of employment). The employee will usually be paid any accrued but untaken holiday but they may also be obliged to take it before their termination date.
• It may be that the position of the parties has already reached a stage where the employee has threatened to claim unfair or constructive dismissal. It may be that the employer wants to avoid the matter going to a tribunal and therefore a Settlement Agreement can be used to settle any claims for an amount agreed between the parties.

It is not necessary to accept the Settlement Agreement first placed upon the table and the employee may want to negotiate for better terms.

But it is also important to consider whether rejecting the Settlement Agreement will act in the employee’s best interests in the long run. A Settlement Agreement does have other benefits other than money. It gives finality to the employee (and employer) and also allows both parties to move on which is sometimes its own reward.

The terms of the Settlement Agreement are always confidential. It is not open to employee or employer to discuss it with any third parties unless specifically stated within the Settlement Agreement. The employee will usually be able to discuss it with their own family (provided they maintain confidentiality) together with certain third parties such as legal and medical advisors, HMRC or as required by law. On the part of the employer, they can discuss the matter internally and with their own third party advisors such as legal advisors, HMRC and so on.

Settlement Agreements vary hugely in length from a few pages to twenty pages plus. Much of the content of a long Settlement Agreement will comprise a lengthy list of all the claims the employee is giving up. In essence the employee will effectively be giving up all of their claims. However there are usually three exceptions:

• For personal injuries that the employee could not have been aware of at the date they signed the Settlement Agreement.
• Any claim to enforce the Settlement Agreement (i.e. if the employer did not pay the sums due).
• If there are any problems with the employee’s pension.

Beyond this all claims would usually be satisfied by the terms of the Settlement Agreement. Settlement Agreements are often used as templates from one to the next and the list of claims that are giving up often include potential claims that have no relevance whatsoever to that particular employer/employee relationship. That said, the takeaway point is that a Settlement Agreement will effectively prevent the employee from bringing any future claim against the employer.

Yes, all Settlement Agreements have confidentiality clauses because the employer is keen to ensure the terms are kept entirely private between the parties. This will usually mean that the employee is unable to disclose the terms or even the existence of the Settlement Agreement to any third party, save as set out within the Settlement Agreement itself. This is to protect the employer’s reputation and of course to prevent other employees negotiating a similar settlement.

There will also be a clause which confirms neither party will be able to make adverse or derogatory comments about one another. This will prevent the employee for example going on social media after they have left complaining about their treatment by the company. The only exception to this is that the employee will be given an opportunity to make “a protected disclosure” i.e. a whistleblowing allegation should that arise. The employee will still be able to report wrongdoing but not to share their personal opinion about the company, employees, directors and shareholders.

Most Settlement Agreements will incorporate an agreed reference which is usually fairly neutral. It will simply state the employee’s start and finish dates, their role and potentially the reason for leaving. It will not usually give a subjective commentary on how good the employee was at their job.

It is always open to the parties to try and negotiate the best terms they can prior to signing on the dotted line.

The employee will always be taxed in the usual way up to their termination date. If they are paid for their notice period, this is also subject to income tax and national insurance deductions. Also, holiday pay and other benefits would be taxed in the normal way. 

The compensatory element of any payment up to £30,000 would however be tax free. If the employee is lucky enough to be offered more than this, the normal income tax and national insurance deductions will be due on anything above £30,000.

Employees should also be aware that a tax indemnity always forms part of any Settlement Agreement. This means that if at a later date HMRC determine the employee is responsible for additional income tax, this clause will confirm the employee remains liable for it even if they have left. The tax indemnity essentially states that the employee must reimburse the employer for any tax HMRC demand of it.

All Settlement Agreements bear this phrase which means that - until both parties have signed and the certificate is signed by the solicitor - the Settlement Agreement will not be binding. It will only become binding or open once the employer, employee and the independent legal advisor have signed.

This is not an exhaustive list but Settlement Agreements will often include additional clauses such as:

• The employee will return all property belonging to the employer before or just after the termination date in good order and delete any information concerning the employer’s affairs held on their own devices.
• The employee will repay any compensation if they commence a claim.
• The employee confirms they have no claims against the employer.

We have helped many employees via our fast and efficient service and consultations usually take place remotely and we can offer a same day service. 

Not quite. A Settlement Agreement is a legal contract between you and your employer, usually used to end your employment on agreed terms - often with a financial settlement and a waiver of your rights to bring a claim. It can be offered in a redundancy situation, but it’s not the same as being made redundant.

Redundancy, on the other hand, is a reason for dismissal - usually because your role is no longer needed. You may be entitled to redundancy pay by law, with or without a Settlement Agreement.