Clarkslegal LLP - Solicitors in Reading and London

Settlement Agreements

Settlement Agreements FAQ's

What is a settlement agreement? 

A settlement agreement is a contract; therefore, once it is signed by both parties it becomes a legally binding agreement, in this case between you and your employer.

Settlement agreements used to be called compromise agreements.

Why have I been given a settlement agreement? 

Employers use settlement agreements as a way of ending employment on agreed terms or resolving employment disputes.

Without speaking to you, we cannot say why your employer has given you a settlement agreement. The most important thing for you to do is to get sound, practical and balanced advice.

How does it work? 

Generally, your employer will agree to pay you a sum of money and in return you will agree not to bring any legal claims against your employer. 

The effect of entering into a settlement agreement 

An employee who enters into a valid settlement agreement will lose the right to bring an employment tribunal claim for breach of any of the statutory employment rights identified in the agreement. 

In simple terms you may be giving up your right to claim, amongst other things:

  • Unfair dismissal 
  • Discrimination 
  • A statutory redundancy payment 
  • An unlawful deduction from wages 
  • Non-payment of the national minimum wage
  • Breach of various maternity and paternity rights.

The settlement agreement may also prevent you from bringing other claims such as for breach of contract, payment of a bonus or for personal injury. 

The agreement will normally only prevent you bringing a personal injury claim that you already know about.

A settlement agreement will not normally prevent you bringing a claim in respect of accrued pension rights.

We will discuss with you the specific circumstances of your case and advise you about the rights your employer is asking you to give up.  

I am giving up a lot. Is this fair or sensible? 

You are giving up a lot and you are right to ask whether this if fair? At this stage, do not panic. We will guide you through the process and ensure that 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? 

There is no need to come to our offices. We can do this over the phone, via SKYPE or even remotely PC to PC or Mac if you prefer. Call and speak to reception and we will guide you through the process. It is simple and fast.

What are the legal requirements for a binding settlement agreement? 

That is a good question. In order to protect you, there are certain legal requirements that have to be met before you can validly give up your statutory employment rights in a settlement agreement. 

Firstly and 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 that you do not inadvertently sign away valuable employment rights and that you are fully aware of the implications when signing the agreement. 

In addition, a settlement agreement will not be legally enforceable unless:

  • It is in writing;
  • It relates to a specific complaint or proceedings;
  • The adviser who provided the independent legal advice is named in the agreement;
  • The adviser is covered by professional indemnity insurance; and 
  • The agreement states that the legal conditions for a settlement agreement have been satisfied. 

All solicitors at Clarkslegal satisfy the legal requirements for advising on settlement agreements.

What are the effects of a valid settlement agreement? 

Provided the settlement agreement meets the legal requirements, you will not be able to bring any of the employment tribunal claims specified in the agreement. If you were to try to bring such a claim, the employment tribunal will refuse to deal with it. 

On the other hand, if any of the legal requirements are not met, you will still be able to pursue a tribunal claim, although you may be required by the terms of the agreement to repay any money received. 

However, an agreement that does not meet the legal requirements may still act as a binding settlement of breach of contract and common law claims. This is because the legal requirements only have to be complied with where the employee is giving up statutory employment rights.

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. 

Your solicitor will take you through the settlement agreement and explain each of the terms and outline the respective obligations of you and your employer. 

Once you have been through the settlement agreement with your solicitor it is usual for them to sign a form or certificate confirming that the advice has been given and that they have a policy of insurance covering the risk of a claim made by you in case the advice they have given turns out to be negligent.

Clarkslegal has an appropriate policy of insurance in place.

Does my solicitor advise me on the merits of my case? 

To comply with the legal requirements of a settlement agreement, the solicitor is not required to advise you on whether the agreement represents a good or a bad deal or on the merits of any legal claims you may have against your employer, or the value of such claims. 

The solicitor’s job is to make certain that you understand the agreement and in particular what rights you are giving up in return for the settlement sum.

We can of course advise you on these other issues and seek to negotiate with your employer on your behalf, if you wish us to do so. 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? 

In order to for you to decide whether the payment you have been offered is sufficient, you need to understand how an employment tribunal will calculate compensation.

Most compensation is based on your financial losses. So, if you have been dismissed unfairly, your unfair dismissal compensation will reflect your net loss of salary and benefits until either you find another job or the tribunal considers you should have found one. This will normally be capped at one year’s gross pay. In an unfair dismissal claim, you are 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 our calculator

If you have been discriminated against, you may be entitled to compensation for injury to feelings in addition to compensation for any financial losses. The amount of compensation will reflect the seriousness of the discrimination, with lower amounts being awarded for one-off incidents and the highest awards being reserved for lengthy campaigns of harassment.

Who pays the solicitor? 

Normally your employer will make a contribution towards the costs you incur obtaining legal advice on the terms and effect of the settlement agreement. Often this contribution will be sufficient 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 are unable to do so, or any increased contribution is insufficient to cover your bill, you will 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 make its contribution to your legal costs and you will be responsible for the whole bill.

I understand tax is payable on the compensation. Is this true? 

Some elements may be taxable.

Payments for work done (such as wages or bonus) or because of a clause in the employment contract (such as a provision allowing the employer to terminate by making a payment in lieu of notice) will have deductions made for 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 will advise you if this applies in your case.

There is a clause in the settlement agreement which says I agree to indemnify my employer against the risk of the HMRC seeking income tax and NICs. What does this mean? 

If a compensation payment is made free of income tax and NICs, your employer may require an indemnity (assurance) from you in case HM Revenue and Customs argues that income tax and NICs should have been deducted. It means that you will be required to reimburse your employer should it be required to pay the tax and NICs. We will advise you if an indemnity is sought in your case and we may be able to suggest drafting changes to make the indemnity more reasonable.

What else should I look out for? 

In addition to the provisions already mentioned, an employer may include a range of other provisions in a settlement agreement. An important provision 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:

  • A requirement that you keep the fact of the settlement agreement and its terms confidential;
  • A prohibition on either party making derogatory statements about the other;
  • A reminder that 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; and
  • Repayment provisions should the employee breach the settlement agreement.

What if I do not sign? 

It is entirely up to you whether you decide to sign the settlement agreement. If you decide not to sign, you may instead wish 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 more quickly if, for example, you are complaining about discrimination which occurred during your employment. You will 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 of the time limits which apply to the claims in your case and how to go about notifying Acas.

What is the Acas 10 day cooling off period?

Occasionally an employer may present an employee with a settlement agreement completely out of the blue.

This is more likely to happen where the employee’s performance is being brought into question, and the employer wants to give the employee the option to leave under agreed terms rather than go through a performance process.

If this is what has happened, you do not have to accept the offer. You can reject it, or request a proper performance process is followed.

The ACAS have statutory Code of Practice on Settlement Agreements, sets out how settlement agreements should operate and provides best practice of how pre-termination negotiations should be undertaken. The code is not binding, but employers would need to justify why they deemed it not necessary to adhere to it.

The ACAS Code recommends that employees are given a period of 10 calendar days to consider an offer made by an employer, but it can be less, if this is considered to be reasonable.

Always seek legal advice before signing the agreement.

For further information about this or any other Employment matter please contact Clarkslegal's employment team by email at employmentunit@clarkslegal.com by telephone 020 7539 8000 (London office), 0118 958 5321 (Reading office) or by completing the form on this page.