Settlement Agreements & Negotiating Exits
Achieving a fair outcome
When the relationship between employer and employee breaks down, one solution is for both sides to negotiate an exit, which usually includes a settlement agreement.
This is a legally binding agreement, which allows an employee to receive compensation (sometimes tax free) in return for agreeing not to pursue a case in the Employment Tribunal.
We advise on hundreds of settlement agreements (formerly called compromise agreements) each year. We’ll cut through the jargon and explain everything in plain English, before advising you of your options. Rest assured, we’ll work hard to ensure you receive an outcome you’re happy with.
If you've been given a settlement agreement, contact any of our offices below (London City, Mayfair, Canary Wharf or Reading) to ask questions or to make an appointment with one of our specialist employment law solicitors. Telephone us on 020 7329 9090, email us at firstname.lastname@example.org or use the contact form here.
Got a question? We’ve put together some frequently asked questions about settlement agreements.
What is a settlement agreement?
It’s a contract, so once it’s signed by both parties it becomes a legally binding agreement between you and your employer. Settlement agreements used to be called compromise agreements. Employers often use settlement agreements as a way to end employment on agreed terms or resolve employment disputes. The most important thing is to get sound, practical and balanced advice.
How does it work?
Your employer will generally agree to pay you a sum of money, and in return, you’ll agree not to bring any legal claims against them.
The effect of entering into a settlement agreement
If you enter into a valid settlement agreement you may be giving up your right to claim, amongst other things:
- unfair dismissal
- a statutory redundancy payment
- an unlawful deduction from wages
- non-payment of the national minimum wage
- breach of various maternity and paternity rights.
Settlement agreements may also stop you from bringing other claims such as for breach of contract, bonus payments and personal injury. We can discuss the specific circumstances of your case and advise you on the rights your employer is asking you to give up.
I’m sacrificing a lot. Is this fair or sensible?
You’re right to ask. At this stage, don’t panic. We’ll guide you through the process and ensure everything is in order before you decide whether to sign.
Do I need to come to your offices or can we do this over the phone?
What are the legal requirements for a binding settlement agreement?
To protect you, there are certain legal requirements that have to be met before you can give up your statutory employment rights in a settlement agreement. Most importantly, you must receive independent legal advice on the terms of the settlement agreement and their effect on your ability to pursue your rights in an employment tribunal.
Getting impartial, balanced and practical legal advice ensures you don’t inadvertently sign away valuable employment rights and you know the implications when signing the agreement. Plus, a settlement agreement isn’t legally enforceable unless it meets certain legal conditions. All of our employment lawyers can advise on settlement agreements.
Why do I need a solicitor?
The solicitor’s role is to advise you on the terms and effect of the settlement agreement, and its effect on your ability to pursue your rights in an employment tribunal. We take you through the settlement agreement, explaining each of the terms and outlining the respective obligations of you and your employer.
Once you’ve been through the settlement agreement with the solicitor it’s usual for them to sign a form or certificate confirming the advice has been given and they have a policy of insurance covering the risk of a claim made by you. This is in case the advice turns out to be negligent. Doyle Clayton has an appropriate policy of insurance in place.
Does the solicitor advise me on the merits of my case?
The solicitor’s job is to make certain you understand the agreement and what rights you’re giving up in return for the settlement sum. We can advise you on these other issues and seek to negotiate with your employer on your behalf. However, this may fall outside the scope of the advice for which your employer is prepared to pay (see ‘Who pays the Solicitor’ below).
Is the compensation payment fair?
To decide whether the payment you’ve been offered is fair, we’ll need to discuss your particular circumstances with you. Sometimes you may want to try to obtain more compensation from your employer. You’ll also need to understand how an Employment Tribunal calculates compensation, which is usually based on your financial losses. So if you’ve been dismissed unfairly, your compensation would mainly reflect your net loss of salary and benefits until either you find another job or the Tribunal considers you should have found one.
This is normally capped at a year’s gross pay. In an unfair dismissal claim, you’re also entitled to a basic award based on salary, age, and length of service. This sum is similar to a statutory redundancy payment. You can work out the level of this award by using a ready reckoner.
If you’ve been discriminated against, you may be entitled to compensation for injury to feelings as well as compensation for financial losses. The amount of compensation will reflect the seriousness of the discrimination, with lower amounts awarded for one-off incidents and high awards for lengthy campaigns of harassment.
Who pays the solicitor?
Your employer will normally make a contribution towards the costs you incur getting legal advice on the terms and effect of the settlement agreement. Often this contribution is enough to cover the whole bill.
However, this may not be the case where the agreement is particularly complex, or if you require us to advise on the merits of your potential claims or to negotiate directly with your employer on your behalf.
In some cases, we may be able to negotiate a higher contribution from your employer but if we can’t, or any increased contribution is not enough to cover your bill, you’ll be responsible for the balance and we may ask you to make a payment on account.
What if I don’t sign the settlement agreement?
If after talking to a solicitor you decide not to sign the settlement agreement, your employer will not contribute to your legal costs and you’ll be responsible for the whole bill.
Is tax payable on the compensation?
Some elements may be taxable. Payments for work done (such as wages or bonus) or because of a clause in the employment contract (for example making a payment in lieu of notice) will be liable to income tax and national insurance contributions (NICs). The same applies to payments made by your employer in return for you agreeing to enter into new post-termination restrictions.
However, you may be entitled to receive up to £30,000 free of income tax and NICs, if the payment is compensation for the loss of your employment. We’ll advise you if this applies in your case.
What else should I look out for?
An employer may include a range of other provisions in a settlement agreement. An important one from your perspective may be that your employer provides a reference and it may be possible to agree the wording as a term of the agreement.
Other common terms include:
- keeping the facts of the settlement agreement and its terms confidential
- prohibiting either party from making derogatory statements about the other
- a reminder the confidentiality obligations and any post-termination restrictions contained in the employment contract continue to apply (or in some cases, new restrictions will be imposed)
- a record of the parties’ understanding of the tax position and a tax indemnity from the employee
- repayment provisions if you breach the settlement agreement.
What if I don’t sign?
You may prefer to bring a Tribunal claim against your employer. The time limit for bringing most employment tribunal claims is three months less one day from the date your employment terminated. You may have to act quickly if, for example, you’re complaining about discrimination that occurred during employment. You’ll also have to notify Acas of your claim before you can issue Tribunal proceedings.
If you decide not to sign the agreement, we can advise you on time limits applying to claims in your case, and how to go about notifying Acas.