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What are common clauses in Settlement Agreements?

We are Settlement Agreement Lawyers: As you will expect, Settlement Agreements will normally deal with:

  • The Termination Date
  • Salary and Benefits to the Termination Date
  • Payment in lieu of holiday accrued but untaken to the Termination Date
  • The payments to be made under the Settlement Agreement, and when they will be paid
  • Settling claims arising from your employment or its termination

Other common clauses include:

  • 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.


  • 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.


  • 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.

Call today for specialist and independent legal advice from a qualified employment solicitor.


Common Questions regarding Settlement Agreements





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