Settlement Agreement

A settlement agreement (formerly known as a compromise agreement) is a legally binding contract between an employer and an employee that formally ends the employment relationship. It typically includes a financial payment—often referred to as a severance or ex-gratia payment—in exchange for the employee agreeing not to pursue any employment-related claims in an Employment Tribunal.

Settlement agreements can be used in various scenarios, including:

• Resolving workplace disputes or grievances
• Offering an alternative to disciplinary, performance and capability procedures
• Facilitating an employee’s departure, even without misconduct or fault
• Providing enhanced redundancy payments

Legal Requirements

For a settlement agreement to be valid, the following conditions must be met:

• It must be in writing
• The employee must receive independent legal advice on the terms and implications of the agreement

Key Points on Settlement Agreements

We have set out below some key factors relating to settlement agreements.

1. What is a settlement agreement?

A settlement agreement (formerly known as a compromise agreement) is a legally binding contract between an employer and employee that formally ends the employment relationship. It usually involves the employee receiving compensation in exchange for agreeing not to pursue certain legal claims against the employer.

2. Why might I be offered a settlement agreement?

You may be offered one:

• As part of a redundancy process
• To resolve a workplace dispute
• Performance concerns
• Following a grievance or disciplinary process
• If you’re off sick long-term and unable to return
• If the employer feels your employment is not working out/there has been a breakdown in the relationship and wants you to leave. This can sometimes be put to you as a protected conversation.

3. Do I have to accept a settlement agreement?

No. You are not obliged to accept it. If you choose not to sign, you retain the right to pursue claims through an employment tribunal, subject to time limits.

There will be a number of factors to take into account including how much money is being offered by way of compensation, the situation you are facing (redundancy, performance issues) and any other terms that are being suggested, such as a reference, announcement to colleagues, outplacement counselling.

It is therefore important to weigh up the pros and cons of entering into a settlement agreement. This is where taking independent advice from Aeris Employment Law Ltd will be crucial.

4. Can I request a settlement agreement myself?

Yes but this is relatively rare. Employees can initiate discussions, especially if they are considering resignation or have grounds for constructive dismissal.

5. Do I need legal advice before signing?

Yes. It is a legal requirement that you receive independent legal advice before signing. Your employer usually contributes to the cost of this advice. This can be anywhere in the range of £350 – £750 plus VAT. The contribution that is offered will normally cover the advice Karin Henson can provide on the terms and effect of the settlement agreement offered unless the matter becomes particularly complicated or difficult.

If additional work is required to negotiate a settlement, it will be up to the employer whether they cover these additional costs. Karin Henson will seek to have the employer’s contribution increased to cover all your fees.

6. What can be included in a settlement agreement?

Common terms you will see include:

• An agreed end date
• Financial compensation
• Notice pay – often paid in lieu of your notice period (PILON)
• Holiday pay
• Benefits including pension and health cover
• Continued use of company car
• A reference for future employment
• Confidentiality clauses
• Restrictive covenants (e.g., non-compete clauses)

7. Is the compensation taxable?

Generally, the first £30,000 of non-contractual compensation is tax-free. However, payments such as notice pay, holiday pay, bonus, commission and other contractual payments are subject to tax and National Insurance.

The balance of any compensation that is over £30,000 will be taxable at your normal tax rate.

8. How quickly can a settlement agreement be agreed?

You should be given a reasonable amount of time to review the terms offered and to seek advice. The amount of time that is required for this will depend on the individual circumstances. If an offer has been made via a protected conversation, the usual timescale is 10 calendar days.

Aeris Employment Law Ltd will be able to help you as soon as you need support for your settlement agreement.

9. Is a settlement agreement confidential?

It is very common for a settlement agreement to include a clause restricting what both you and the employer can say about the negotiations and what has been agreed. There will be limits on the use of confidential information and it is also common to see a clause requiring both sides not to badmouth the other.

10. Does a settlement agreement need to be discussed face-to-face?

No – settlement agreements can be discussed over the phone or via video calls. Settlement agreements also do not need to be witnessed, and they are often signed using an electronic signature as opposed to having to send anything in the post.

11. Can one side change their mind once they have signed the agreement?

Once both sides have signed the agreement, it is a binding agreement that applies to both the employer and you as the employee. If you take advice on the agreement and then decide not to sign it, you will not allowed to refer to the details of any off the record discussions in any subsequent tribunal claim you may seek to bring at a later date.

12. What happens if I breach the agreement?

Breaching terms (e.g., confidentiality or non-compete clauses) may result in:

• Loss of compensation
• Repayment of sums already received
• Legal action by your employer

13. What if my employer breaches the agreement?

You may be able to take legal action to enforce the agreement or claim damages. Legal advice should be sought immediately.

14. How long do I have to decide?

ACAS recommends a minimum of 10 calendar days to consider the offer. You should not be pressured to sign immediately. It is not uncommon however for agreement to be reached in a shorter period of time.

15. Can I negotiate the terms?

Absolutely, particularly if you feel the offer made is unfair or too low. You can negotiate:

• The amount of compensation
• The wording of the reference
• The reason for leaving (e.g., redundancy)
• Any restrictive covenants

16. Will signing affect my ability to get another job?

Not necessarily. However, restrictive covenants may limit where you can work next. A well-worded reference can help your job search.

If you are placed on garden leave during your notice period, you will not be able to start a new job during the garden leave period.

Depending on the wording of the settlement agreement, you will not be able to tell a new employer that you signed a settlement agreement.