Q&A on Settlement Agreements

Laura Claridge, a senior lawyer in our Employment team answers some common questions surrounding Settlement Agreements.

What is a Settlement Agreement?

A settlement agreement is a contract between you and your employer which brings your employment to an end by mutual consent.  If you decide to sign the agreement, it will prevent you from bringing employment tribunal claims against your employer.  In exchange for this, your employer will usually pay you an enhanced termination or severance payment and sometimes additional benefits, with an agreed reference and announcement about your departure.

Are there any formalities with a Settlement Agreement?

• The agreement must be in writing, mention the particular claims it settles, and confirm that it complies with relevant legislation.  It is not enough for the agreement to just say that it is in ‘full and final settlement of all claims’.
• You must take independent legal advice on the terms of the settlement agreement for it to be legally binding and to ensure that you fully understand the agreement and the claims being settled by it.  It is customary for the employer to make a contribution towards the legal costs of advice on the agreement.

I am not happy with the compensation package being offered by my employer. Can I negotiate for more?

There will be grounds for negotiation if the amount offered does not go some way to reflect the value of the claim(s) that you are being asked to waive.  At the same time, you will need to weigh up the potential value of your claims with the risk of litigation and the time it may take for the matter to be heard by the Tribunal.

I have a personal injury claim against my employer, can I still pursue that if I sign the Settlement Agreement? 

Yes, an existing personal injury claim can be carved out of the scope of the agreement.  Additionally, employees can still bring claims if the employer breaches the settlement agreement (e.g. fails to pay the settlement sum), for future personal injuries and claims in relation to accrued pension rights.

Will I be able to talk to people about my dispute with my employer once I have signed the settlement agreement?

Usually the agreement will include a confidentiality clause limiting what you can say about your (ex)employer.  This will be subject to some important exceptions, for example allowing you to talk to your family in confidence, a recruiter to discuss your employment history or to a professional to seek advice. The agreement should also acknowledge your right to whistleblow and make certain disclosures about a criminal offence or other unethical conduct.  However as part of the settlement, your employer will expect you not to make general disclosures about an underlying dispute.  There is often as well a clause preventing each party from bad mouthing the other. 

Will I have to pay tax on the money that I receive under the Agreement?

Generally, following termination of employment you can be paid up to £30,000 compensation tax free.  However any payments due under the employment contract, including notice, salary, bonus and holiday pay must be paid first with tax and National Insurance Contributions deducted before any sum due on termination can be paid tax free.

To discuss a Settlement Agreement offered by your employer in complete confidence, please contact Laura Claridge by email or telephone 01689 887873.