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What does a Settlement Agreement mean for you?

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A Settlement Agreement (also known as Compromise Agreement or a Redundancy Agreement) is an agreement ending statutory claims (for example unfair dismissal or discrimination) arising out of your employment its termination.

In a nutshell, you have to go off and get independent legal advice before signing away your legal rights. We will advise you on any potential claims so that the employee fully understands the legal issues, and the value of any potential claims before making an informed decision. We often negotiate a better deal for our clients. It is important that you fully understand the terms of the proposed Settlement Agreement, and what it means for you.

Common Questions regarding Settlement Agreements

Employees:

As specialist employment solicitors we have advised hundreds of employees and helped them to get the best possible settlement. If you instruct us, as employment lawyers we will:

  1. Advise you on whether any claims arise on the termination of employment.
  2. If so, advise you what those claims might be worth.
  3. In the light of that information, advise you whether the sum offered is reasonable in the circumstances.
  4. Explain the meaning and effect of the agreement to you and advise you whether anything needs to be amended or changed.
  5. Negotiate on your behalf as required.

The cost of advice will often be covered by the employer, meaning that you may not have to pay anything for this advice personally.

See our Redundancy Calculator Tool.

Employers:

Many employers fall into some very difficult traps when offering compromise agreements and the taxable position on severance payments is not always straight-forward. We are employment lawyers and solicitors based in Central London who can guide you through this difficult process, so call us now to discuss your situation.

Settlement Agreements: An Overview

Why do I need to sign a Settlement Agreement?

If your employer wishes to prevent you from bringing, or continuing, any statutory claims that have arisen or might arise from your employment or its termination, it is necessary to have a formal Settlement Agreement (previously known as a ‘Compromise Agreement’). The statutory claims that are being compromised by the agreement have to be specified in it. Statutory claims will include, for example, unfair dismissal, unlawful deductions from wages, sex, race, age or other unlawful discrimination.

Employers also use Settlement Agreements to settle other claims arising from your employment such as breach of contract and claims in negligence (for example personal injury claims).

Once a Settlement Agreement is signed by both parties, it will bring to an end your right to pursue the specified statutory claims and other claims arising from your employment or its termination in an Employment Tribunal or elsewhere (including for example the County Court or High Court). Before you decide whether to sign away your rights, you may therefore wish to seek advice in order to:

  • identify any claims arising from your employment or the circumstances of its termination. If, for example, the Settlement Agreement is being offered to you as a result of a redundancy situation, the procedure adopted might give rise to a claim for unfair dismissal, or there may be claims for unpaid salary, bonuses or other matters. In order to do this, we will need to know from you all the relevant facts;
  • consider the merits of any claims and their potential value; and
  • consider whether the sum offered as settlement is reasonable.

The advice we give will normally cover what the terms of the agreement are and what they mean, and not detailed advice on the above matters. If you wish to have more detailed advice, please let us know and we will discuss the cost implications.

Why do I need to have a solicitor?

In order for a Settlement Agreement to be effective, you need to have had independent legal advice on its terms and effect. Generally your legal adviser will be asked to sign a certificate attached to the agreement or a letter to confirm:

  • that they have advised you
  • that they are a qualified solicitor
  • that they hold a current practising certificate and
  • that their firm has indemnity insurance in place.

I confirm that I and Reculver Solicitors comply with these requirements.

You are of course free to instruct whoever you wish to provide you with independent legal advice, provided they are qualified to do so, even if you have been referred to us by your employer. Our duty is to act in your best interests and never in those of the employer.

 What matters do I have to consider?

There are a number of issues which typically come up when reviewing Settlement Agreements:

  • It is important to understand that the Settlement Agreement will generally comprise the ‘entire agreement’, which is to say that everything agreed between you and your employer should be incorporated into the document. You may not be able to enforce anything agreed informally or before the agreement is signed if it is not in the agreement. If there is anything that has been agreed which is not in the agreement, please bring it to our attention.
  • There will normally be a clause stating that you will be paid your salary as normal up to and including the date your employment ends, less deductions for tax and national insurance.
  • There will also normally be a clause stating that you will receive a payment in lieu of any holiday accrued but untaken to the termination date. This will be taxed in the normal way. If you have taken more than your accrued holiday, you may be required to repay the excess.
  • You may have either worked your notice period or be receiving a payment in lieu of notice. If you are receiving a payment in lieu of notice, this must be paid with deductions of tax and national insurance.
  • If you are entitled to commission or contractual bonuses, or if you have share options or vested shares in your employer, you should inform us and we will need to ensure that these are properly dealt with in the Settlement Agreement. Detailed consideration of such schemes would not normally be covered by advice on the terms and effect of the agreement, and if it is required, we will discuss the cost implications with you.
  • You should ensure that you have submitted all claims for expenses from your employer.

Have I got a good deal?

A sum of money is normally offered in addition to any payments your employer is obliged to pay you. This is often referred to as the Compensation, Termination, Ex Gratia or Settlement, Payment.

The payment may not be as generous as it initially appears; for example it may include your entitlement to notice and/or statutory redundancy pay. Bear in mind that there may not be any obligation on your employer to offer enhanced payments in a redundancy situation.

Although a consideration of the adequacy of the payment in your particular circumstances is outside the scope of this document, it is a good rule of thumb to calculate how many weeks’ or months’ net pay it represents. Employment Tribunals make their awards based largely on your loss of net earnings from the date of termination. This could take three to six months or longer and it is normally only if we can identify strong legal claims that we may be able to negotiate an increase in the payment.

How is the compensation payment taxed?

Under the Income Tax (Earnings and Pensions) Act 2003 (‘ITEPA’), payments made in respect of compensation for the termination of employment are normally exempt from tax up to £30,000. Any part of the payment that is over £30,000 will generally be subject to tax at the full applicable rate.

However, there are some exceptions. For example, if you are being made a payment in lieu of notice or any part of your compensation payment is referable to notice monies, it will be taxable. Also, any sums paid in exchange for your agreeing to enter into post-employment restrictions (such as non-compete provisions) will be taxable.

Even if we and your employer believe that any payment can be paid tax free, it is important for you to remember that there is always a risk that HM Revenue and Customs may take the view that tax has to be paid.

In almost every Settlement Agreement, there will be a tax indemnity clause, stating that in the event that any tax liability arises, it will be your responsibility and not the employer’s. The clause typically states that if the Revenue makes a demand against the employer for tax, then the employer can recover that sum from you, together with any interest, penalties or associated costs.

Employers rarely agree to the indemnity clause being removed but when we review the agreement we will consider ways of ensuring that the risk to you is minimised, as the agreement may be poorly worded and give rise to an unnecessary exposure to tax, and also will request that you be given reasonable warning of any liability under the clause if appropriate.

Are there any claims that I can bring even if I sign a Settlement Agreement?

Although the purpose of the Settlement Agreement is to settle all claims arising from your employment or the termination of your employment, we would normally expect to see certain claims excluded:

  • Claims to enforce the terms of the Settlement Agreement (although this may be implied)
  • Claims with respect to accrued pension rights to the date of termination (if applicable). If you are a member of an occupational pension scheme, your pension rights may be frozen at the date your employment ends until your retirement date. Please note we cannot offer financial advice on pensions and other financial matters and you should speak to an independent financial adviser or the pension provider itself for information.
  • Personal injury claims. Normally employers will ask you to confirm that you are not aware of any personal injury claims or any circumstances that might give rise to any. So if for example you have tripped over a cable at work, injured your back lifting heavy boxes or developed pains in your wrist from typing, or think that any injury or condition may develop because of your working environment or anything that has happened at work, please let us know. We are not personal injury lawyers and cannot advise you on such claims, but we can take appropriate steps if we identify them. However, if, for example, after signing the agreement, you develop a medical condition such as asbestosis, having been unknowingly exposed to asbestos dust at work, your right to bring a personal injury claim would be unaffected.
  • Where the particular claims that you might have against the employer are not specified in the agreement, or where there is simply a list of all claims that you could bring, whether or not they apply to your specific circumstances, there may also be a technical legal argument that the agreement does not comply with statute and that even if you sign it you could still bring certain statutory claims. Bringing a claim might have other implications, however, such as repaying the compensation payment and this will not affect other claims such as breach of contract. Please let us know if you want to discuss this further.

 Will I have to pay anything for your advice?

Employers will typically contribute to the cost of your obtaining independent legal advice up to a specified sum. Once the agreement is concluded we will raise an invoice addressed to you but marked as payable by the employer, and send it to the employer for payment. You will be responsible for any costs over and above this contribution and we would also refer you to our client care letter.

 What will I have to do?

Apart from giving up your legal rights, you may be required to do other things, including:

  • To return all property belonging to your employer in your possession. This will ordinarily include all documents (including copies) in whatever format (including electronic). However, if you want to retain property such as a laptop you have used or your mobile phone or number, we will have to discuss this.
  • Not to disclose confidential information to third parties. Confidential information will probably be defined in the agreement but is likely to cover commercially sensitive information which is not already known to the public. This may also be dealt with in your contract of employment.
  • To keep the terms of the Settlement Agreement confidential and not (for example) to discuss the terms with your colleagues. You may also be required to keep the fact of the agreement and the circumstances concerning the termination confidential, although you will probably be allowed to discuss the agreement with certain parties, including us as your legal advisers, other professional advisers and your immediate family, or if you are required by law to do so. If you think you will need to speak to others you should let us know.
  • Not to make critical or damaging comments about your employer.
  • To repay the compensation payment if you are in breach of the Settlement Agreement or to indemnify the employer for any costs or damages should you bring a claim. A clause requiring you to repay the money may be unenforceable as a ‘penalty clause’, depending on how it is drafted, but it is important that you are fully aware of such a clause if it is in the agreement and you should not in any case enter into the agreement in the expectation of breaching it in the future unless you have fully discussed the matter with us before you sign.
  • To confirm you have not committed any serious breach of your contract of employment. If, after the payment has been made, the employer discovers some misconduct on your part, it could attempt to recover the money paid to you.
  • To confirm that you do not have an offer or an expectation of an offer of new employment or other income. Do let us know if you have got another job. Apart from anything else it will have an impact on the value of any claims arising.
  • To agree to certain restrictions on the work and business activities you can do after your employment ends, or there may be a reminder of restrictions that are already in your employment contract. It is important to ensure that you are aware of the content of any such existing restrictions. Detailed advice on such restrictions would not normally be covered by the advice on the terms and effect of the agreement and we will discuss the cost implications if appropriate. Usually where such a restriction is imposed by the Settlement Agreement, there will be a separate, taxable, payment for your agreeing to that restriction. The reasons are to protect the tax-free status of the compensation payment and also to give some value, or consideration, to the restriction, which may make it more legally enforceable from the employer’s point of view.

What will my employer have to do?

We would normally expect the agreement to incorporate the wording of a reference that your employer will provide to any prospective employer or agent that asks for one. It is increasingly common nowadays for employers only to give brief factual references, simply confirming job title and dates of employment, especially if you are employed by financial or legal institutions. This is because your employer could be sued by a future employer if they say anything which is inaccurate or misleading. This can be a concern to employees, but the more common this practice is, the less that is likely to be read into it by a future employer.

It may be worth asking for reciprocal obligations from your employer in respect of confidentiality and/or critical or damaging comments, particularly if you are leaving in unhappy circumstances. Please let us know if you would like us to raise this.

Why is the agreement and correspondence marked ‘Without Prejudice and Subject to Contract?’

 Most Settlement Agreements are stated to be ‘without prejudice’ until they are signed by both parties. This means that they are off the record and cannot normally be referred to in legal proceedings. Once they are signed, they become ‘open’ and legally binding and can be referred to if, for instance, one party alleges that the other has breached the agreement.

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