Settlement Agreements
PLEASE NOTE: This page is intended to give general information about the law but is not intended as legal advice and you must not rely on it as such, nor is any liability accepted if you do rely on it. The law may change from time to time and we cannot include all elements of the law and its application in this summary. For further advice relating to your circumstances, please contact us.
What is a settlement agreement?
Settlement agreements (formerly known as compromise agreements) are one of the very few ways in which employment claims can be settled.
Sometimes, they are offered to settle an ongoing workplace dispute, but they are most frequently used when an employment relationship ends. Employers will want a clean break and some peace of mind that the employee won’t sue them now, or in the future.
In return for signing the agreement and the employee agreeing to give up almost all of their employment rights, the employee will be given a compensation package, usually including financial and non-financial benefits.
Why does the employee have to get independent legal advice on the settlement agreement?
The settlement agreement will not be legally binding until the employee has obtained advice on its terms and effect, from an independent legal adviser, such as a lawyer or certified and authorised member of a trade union. This is to ensure that you fully understand the terms of what you are signing.
How long does the employee have to get this advice?
The employer will usually set a deadline, but it should be reasonable. The ACAS Code of Practice on settlement agreements specifies a minimum of ten calendar days unless the parties agree otherwise.
How much will the advice cost?
Although it will vary depending on complexity and seniority of the role, our usual minimum fee is £500 plus VAT for advising on settlement agreements.
Typically, for a straightforward matter, this will cover:
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an initial meeting (usually by telephone), where we will ask you for some background information, advise you on the terms and effect of the settlement agreement, (briefly) and on whether any of the terms should be amended to protect your position,
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all formalities associated with signing the agreement, and
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a letter confirming our advice on the terms and effect of the agreement.
Our fees are likely to be higher if:
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there is a re-affirmation agreement as part of the agreement,
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the agreement itself, or the background circumstances are less straightforward, or
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you ask us to review any other documentation (other than your employment contract) such as partnership deeds or share scheme documentation), or
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you ask us to get involved with negotiation of the settlement terms or compensation package, or
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you ask us to provide detailed advice on the prospects of success of any claims that you might have against your employer or detailed advice on contractual matters such as restrictive covenants.
We will tell you if your costs are likely to exceed the minimum fee and provide you with a quote for our additional costs.
If you decide to incur the additional fees, we will try to persuade your employer to increase their contribution towards your legal fees as part of the negotiation. However there is no guarantee that they will agree, in which case you will be responsible for the balance of our fees.
Who pays for the advice?
The employer usually pays the fees, or makes a contribution towards them. However, they will probably only pay the fees if you ultimately sign the settlement agreement.
Therefore, if you receive advice from us and then decide not to sign the agreement, you will be responsible for our fees at our normal hourly rate.
Can I negotiate a better compensation package?
There may be grounds for negotiation and your employer may increase the compensation on offer.
Negotiating is likely to cost you more in legal fees (see above) and we cannot guarantee that it will be successful but sometimes it is the right thing to do. We will discuss with you the cost vs benefits of negotiating for a better package.
Will I have to pay tax on my compensation package?
We are not tax experts and are not authorised to provide you with tax advice. Generally speaking, an employer can pay a leaving employee up to £30,000 tax free for ex-gratia settlement payments.
Notice payments (or their equivalent) are always subject to deductions for tax.
Agreements will usually contain a tax indemnity which means that if, in the future, HMRC decide that tax is payable, then your employer can pass that tax demand on to you.
If you require specific advice on tax liability, you should seek advice from a financial adviser or accountant before you sign the agreement.
Are there any claims I can still bring after signing the agreement?
We will advise you specifically as to which claims are settled by the agreement and which you will still be entitled to pursue. However, usually, settlement agreements preserve your right to bring claims to enforce the settlement agreement itself, for personal injuries of which you are not aware, and in respect of accrued pension rights.
If you believe you have suffered a personal injury at work, you should seek separate advice on this before you sign the settlement agreement.
Can I tell anyone about my settlement or how my employment ended?
There is likely to be a strict confidentiality clause in your agreement. In particular, your employer will not want you to speak to colleagues about the deal that you have been offered. We will advise you specifically what you are allowed to say (if anything) and to whom.
There is also likely to be an “anti-badmouthing” clause in the agreement which prevents you from saying anything derogatory or disparaging about your employer, its officers or employees. You should therefore be very careful what you say in public about your employer. Again, we will advise you specifically on your obligations.
Can I negotiate for a better reference?
There is no obligation in law for an employer to provide an employee with a reference. Any reference provided must be true, accurate, fair and not misleading. Brief, factual references are very much the norm.
If you would like us to negotiate for a more detailed reference, we are happy to try, but bear in mind that many employers make it their policy only to give out basic information.
What information do we need when advising on a settlement agreement?
It is useful for us to have a copy of your contract of employment along with the draft settlement agreement. We will let you know if we require other information for instance in relation to share schemes or other benefits.
Further advice
If your employer has given you a settlement agreement to sign, or if you have any questions about settlement agreements generally, please contact us.