A settlement agreement (once called a compromise agreement) is a legally binding contract between an employer and an employee that usually brings an employment relationship, or a dispute, to a close on agreed terms. In return for a payment and other agreed terms, the employee gives up the right to bring certain claims. Because it waives legal rights, the law requires you to take independent legal advice before signing. We provide that advice.
Why independent advice is required
For a settlement agreement to be valid, you must receive advice from an independent adviser, usually a solicitor, on the terms and effect of the agreement and, in particular, on your ability to bring a claim before an employment tribunal. Employers usually contribute towards the cost of that advice, and the contribution is normally written into the agreement. The purpose of the requirement is that you understand exactly what you are giving up before you agree to it.
The key terms to check
- The payments. What is being paid, how it is broken down (notice, holiday, a tax-free ex-gratia element up to the current threshold, and any taxable elements), and when it will be paid.
- What you are waiving. Which claims are settled, and whether anything (such as accrued pension rights or personal injury claims you do not yet know about) is carved out.
- References. Whether an agreed reference is attached, and its wording.
- Restrictions. Confidentiality, non-derogatory statements, and any post-termination restrictions on where and how you can work.
- Repayment clauses. Whether any of the money must be repaid if you breach a term.
Tax and timing
The way a settlement payment is structured affects how it is taxed, and getting this right can make a real difference to what you actually receive. Genuine ex-gratia termination payments may be tax-free up to £30,000, while payments for notice or accrued holiday are taxable in the normal way. Since April 2018, any payment representing notice not worked (post-employment notice pay) is taxable even if the agreement does not describe it as notice pay. We will explain how your figures are treated, so that you know what you will receive after tax.
Taking advice in time
Settlement agreements often come with a deadline, and it is reasonable to ask for enough time to take proper advice. We will review the agreement, explain your options and, where appropriate, negotiate improved terms on your behalf. If you have been offered a settlement agreement, call us on 01482 228808.