A Basic Guide To Settlement Agreements

Your employer has given you something called a “Settlement Agreement” (or told you that they intend to do so).

What does that mean ?

What do you need to do ?

First of all, don’t panic ! This type of document is very common, and sadly (as a result of the Covid-19 crisis) likely to become even more so.

In simple terms, a Settlement Agreement (which was known as a “Compromise Agreement” until 2013) is intended to tie up all the loose ends which can arise when an employee and employer go their separate ways, whether that parting be amicable or otherwise.

This guide will take you through the basics, but if you are an employee, and intend to sign a Settlement Agreement, you will have to take professional legal advice at some point before doing so. Our experienced solicitors will be happy to offer professional and practical advice on your Settlement Agreement, in a manner which is convenient for you (and of course in line with all relevant Government Covid-19 guidelines).

In Which Kinds of Circumstances Might I Have to Sign A Settlement Agreement ?

A Settlement Agreement will be offered in any situation in which your employment is terminating, and your employer is seeking something from you which affords them some degree of protection.

Most commonly, there may have been a dispute between the employer and employee (perhaps in the form of disciplinary action or a grievance), and the employer will be seeking assurance that the person leaving their service is not going to bring any kind of claim against them in the Employment Tribunal.

Alternatively, the employment relationship may be ending due to a redundancy situation, and the employer may wish to have protection against a potential claim for unfair dismissal, possibly by offering an enhanced redundancy payment.

Finally, the employer may simply wish their departing employee to agree to something which restricts what that employee can do once they have left, such as an obligation not to set up in competition against, or publish derogatory comments about, them.  Such obligations may not exist in the original employment contract, or if they do, they may end when the contract ends.  In those circumstance, employers may be prepared to pay for added protection.

Can’t I Just Accept What My Employer Offers Me If I’m Happy With It, Without Seeing a Legal Professional ?

Not if you want the agreement to be legally binding.

The law perceives employment rights as so important, that it provides numerous provisions which require a person to seek independent legal advice from a solicitor (or certified trade union official or adviser) before they sign those rights away.  Gone are the days when unscrupulous employers could try to smooth talk or deceive their staff into accepting deals which sold departing employees short.

This requirement potentially protects employers too, avoiding them paying out money to somebody on the basis of an informal agreement for them not to bring any claims against the employer, only for the employee to then start proceedings anyway.  This is why, in most cases, part of a Settlement Agreement will stipulate that the employer will pay for, or make a substantial contribution towards, the costs of the employee obtaining the required professional advice.

Are There Any Time Limits Which I Need To Be Aware Of, Before I Sign A Settlement Agreement ?

The time limits for bringing almost all kinds of Employment Tribunal claims are far shorter than time limits in many other areas of law.

You therefore need to be aware that if you have a potential claim, the time limit in which to bring it doesn’t expire before the Settlement Agreement becomes binding.

Some employers may try to “run the clock down”, by dragging matters out, and delaying production of the written Settlement Agreement which may have been agreed in principle only.  Once an applicable time limit runs out, your employer will know that it is unlikely in most circumstances that any claim will be allowed to proceed, and will probably withdraw any offers of settlement made.

Calculating time limits can be complicated, and for that reason, we would always advice taking initial legal advice as soon as possible after you become aware that such a claim may exist and/or you are told that a Settlement Agreement is being offered or consider.  This will minimise the chances of deadlines being missed.

If I’m Offered A Settlement Agreement, Do I Have To Accept It ?


It is a contract, and any contract signed against the signer’s will would legally ineffective.

If you are not happy with what is being proposed in the agreement, then you may be able to negotiate improved terms (either on your own, or with the assistance of a professional legal adviser).

There may be risks involved in rejecting a Settlement Agreement or trying to negotiate improved terms, such as :

  • the offer of the Settlement Agreement being withdrawn, or less favourable terms being offered.  Remember that the agreement is not legally binding until it is signed by both the employer and employee (who must have received advice from a solicitor or certified trade union official).
  • you having to commence Employment Tribunal proceedings to try to enforce your employment law rights, and either losing (and getting nothing) or winning less than you were being offered originally under the Settlement Agreement.  In most cases, you cannot recover the costs of representation from your opponents in Employment Tribunal claims (although there are limited exceptions to this), and so even if you bring a claim and succeed, any legal costs which you have to pay out of your compensation could again mean that you end up with less than was being offered in the Settlement Agreement (unless you have legal expenses insurance cover which will pay them for you).  If you lose any Employment Tribunal claim which you bring, it is unusual to be ordered to pay your opponent’s costs unless the claim is seen as having been entirely vexatious (i.e. without any kind of merit at all or brought simply to spite or inconvenience the employer), or your behaviour within the proceedings is considered unreasonable (again, legal expenses insurance cover may afford you some protection).   Different cost implications will apply where a claim is brought in the County Court (as opposed to the Employment Tribunal).

It is a commercial reality that many employers may be prepared to offer compensation within a Settlement Agreement which reflects the fact that if there is a claim brought against them after the employment is terminated, they are likely to have to pay at least something towards their own legal costs of representation, even if they successfully defend the action.   It is therefore often most cost effective for them to make more generous offers before a dispute escalates to litigation.  Once a case is brought, and high legal expenses incurred, there will usually be less “in the kitty” to actual settle the claim in question.

Needless to say, the degree of risk involved will vary depending on the facts of the case, and this is something on which our experienced solicitors will be able to advise you.

The decision as to whether to sign the Settlement Agreement will always be yours, but as you can see, it should always be made after serious consideration of all the relevant factors, and risks involved.

What Kind Of Payments Are Included In A Settlement Agreement ?

It all depends on the individual circumstances of the particular employment which is being terminated.

Typically the Settlement Agreement will include at least one or more of the following :

  • Notice Pay – The law (or your contract of employment) will entitle you to a minimum notice period if your employer is terminating your employment.  If they do not require you to work your notice, they are still required to pay you what you would have earned during the relevant notice period, had you continued working.  This amount will be subject to a deduction for tax and national insurance in the usual way.
  • Payment for Loss of Office – This is in effect a payment to compensate you for the inconvenience of losing your employment, and loss of any statutory employment protection which you may have built up as a result of your period of employment.  For example protection against unfair dismissal usually requires a person to have been employed for two years, a period which will have to built up again if a person starts a new job (leaving them with less protection whilst they do so).  Where there may be a potential claim for unfair dismissal, the amount offered for this payment will often be based around the level of the “basic award” which would be made by the Employment Tribunal if a claim were to succeed, which itself is based on a formula which considers a person’s age; how long they were in the job in question; and their gross weekly pay (i.e. before the deduction of tax and national insurance).  Such a payment will usually be tax free, up to a maximum of £30,000.
  • Compensation for Injury to Feelings – If there is a potential claim for unlawful discrimination, then part of the compensation offered may be based on the level of damages which could be awarded by the Employment Tribunal for any hurt and distress resulting.  It may not always be labelled as such in an offer, or the Settlement Agreement, but it will usually have been factored in to any amount offered.  This type of compensation is not available for other types of Employment Tribunal Claims. Any such payment will usually be tax free, up to a maximum of £30,000.
  • Outstanding Expenses, Commissions and Bonuses – These remain due to you under your Contract of Employment, and are usually clearly specified in a Settlement Agreement.  They will have the same tax implications for you as they would have had, if your employment had continued.
  • Compensation for Loss of Pension Contributions or Medical Insurance – This is less common, but where it does apply will usually be the subject of very case specific negotiations.

What Is A Tax Indemnity Clause ?

The amount of compensation which your employer offers to you will be based on certain assumptions (which should be spelled out in the Settlement Agreement) as regards those parts of the award which may be considered as not being subject to tax or national insurance deductions.

A tax indemnity clause, in simple terms, states that if what you have agreed between you is wrong, and the HMRC seek payment of a further tax payment from your employer in connection with any payment made under your Settlement Agreement, then you will be liable to compensate them for any additional payment which they have to make.

In essence, it passes the risk of the assumptions being incorrect from your employer, to you.

Such a clause is almost always included in a Settlement Agreement, and most employers will be very reluctant to have it removed.  As we have set out above, the employer will want to draw a commercial line under any issues which give rise to a Settlement Agreement, and avoid having to pay out anything more in the future if at all possible.

What Will Happen At The Meeting With a Solicitor ?

Our solicitors have advised people all over the country in connection with Settlement Agreements which they have been offered.

Each set of circumstances is different, but usually :

  • the solicitor will have a brief initial call with you to discuss in very basic terms what specific situation has led to you being offered a Settlement Agreement.  They will also confirm with you whether the amount which your employer has offered to pay towards your legal fees is likely to cover all of our costs.
  • a date and time will be arranged for either a face to face meeting, or video call (whichever is most convenient for you), and you will be asked to bring with you (or send to us in advance) documents which will allow the solicitor to prepare for the meeting (including the draft Settlement Agreement and any other documents which may be relevant, such as your contract of employment).
  • at the meeting (or during the video call) the solicitor may ask for more details about your specific situation, and raise any queries resulting from your answers, and the documentation which you have provided.  Once satisfied that he has a full picture, the solicitor will seek to advise you on the potential value of any claim which you may have against your employer (if any); how much you may receive if any such claim succeeds; and (if possible) advise on how strong any potential claim may be.  Occasionally, if the meeting raises any new issues which require further research, or consideration, the solicitor may suggest a second meeting (or video call), before providing you with any advice.
  • the solicitor will not advise you whether or not to sign the Settlement Agreement.  That must be your decision, but we aim to provide you with as much information as possible to allow you to make a fully informed decision, which you are comfortable with.
  • in appropriate cases, our solicitors can enter into some negotiation on your behalf to try to amend the proposed terms (after explaining to you any potential risks of doing so).
  • if you are happy to sign the Settlement Agreement (having been fully advised) then the solicitor will sign a form of certificate confirming that you have taken independent legal advice, and send the final signed agreement to the other side for them to countersign.  In most cases, the employer will have agreed to pay all or most of your legal fees, and we will arrange to receive payment direct from them at this stage.
  • you should then receive payment of any sums agreed from your employer in accordance within the time limits detailed in the Settlement Agreement.  If they don’t pay, then you can bring a debt action against them.

How Much Will It Cost Me To Get Advice On A Settlement Agreement ?

Our standard fee for advising an employee on a straightforward Settlement Agreement is £380.00 + VAT.

As referred to above, because it is in the interest of employers to ensure that a Settlement Agreement is legally binding, the agreement itself will often provide for the employer to pay the employee’s legal fees (up to a set amount) for the required legal advice.

In straightforward cases, the set amount offered by the employer is likely to cover the entirety of our fees.  If this is not the case, then we will let you know during our initial call with you, and discuss your options before proceeding any further.

Almost always, we will forward your final bill to the employer, and they will pay us direct.

I Want You To Advise Me – Who Do I Contact ?

Our following solicitors will be happy to advise you on your Settlement Agreement.

Dennis Malcolm Brewer

(Managing Director/ Senior Solicitor)

Office : Land of Green Ginger, Hull

Email : dmb@brewerwallace.co.uk

Telephone : 01482 221130

Robert Grant Wallace

(Director/ Senior Solicitor)

Office : 10 Southgate Court, Hornsea

Email : rgw@brewerwallace.co.uk

Telephone : 01964 537856

Sean Gordon

(Senior Solicitor/ Compliance Manager)

Office : 2 Parliament Street, Hull

Email : sg@brewerwallace.co.uk

Telephone : 01482 228808