Employment disputes tend to be disruptive and stressful for both employees and employers alike. But there is a legally binding way to end such disagreements promptly and effectively – without going to court. A settlement agreement typically offers unhappy employees a sum of money, usually in return for terminating their employment.
Organisations of all types and sizes have long-used settlement agreements to end staff contracts on mutually beneficial terms. However, any settlement agreement you sign must protect your best interests, whether you are an employer or an employee.In fact, for a settlement agreement to become legally binding, the employee must first receive independent professional legal advice.
Helping employers and employees alike, our highly skilled settlement agreement lawyers will help you to draft and negotiate the most favourable terms possible. And because signing a settlement agreement early – and before any dispute escalates – can save everyone time and money, we are proud to provide a fast service supported by quality legal advice that is easy to understand.
Do you need advice from settlement agreement solicitors?
Backed with many years’ experience, our employment lawyers have successfully negotiated many favorable settlement agreements for our clients. And, whether you are an employer or an employee, we ensure you get the very best deal possible.
- Fixed-fee funding – We provide an affordable fixed-fee cost for employers.
And for employees, our service is usually paid for by your employer.
- Fast service – we seek the earliest possible resolution to reduce the stress and disruption.
- Best results – we ensure our clients get the best results possible, every
- Expert advice – our partner-led employment lawyers know what it takes to reach a successful outcome.
Here to help with all your employment law needs, including where there are complex and sensitive issues, please contact our settlement agreement solicitors today on 020 7467 3980 or complete the enquiry form on this page.
What is a settlement agreement?
Settlement agreements (formally called compromise agreements) are legally binding contracts between employees and employers. They are used to resolve or avoid workplace disputes, and help to avoid costly and time-consuming legal battles.
Once the details are negotiated, the settlement agreement will set out the full terms agreed by the parties. For example, a favourable payment in return for the termination of employment and a promise that the employee will not bring any legal claims (e.g. unfair dismissal, discrimination, breach of contract, etc.) against their employer. Settlement agreements also tend to include strict confidentiality clauses (also known as NDAs).
A typical settlement agreement might include the following:
- Details of the claim/issues being settled
- The payment to be received
- Whether a reference will be supplied to the employee
- Any notice period/gardening leave
- Any confidentiality clauses/gagging orders
- The employment rights being relinquished by the employee
- Any restrictive covenants
- The impact on the employee’s pension entitlements
- Any tax implications (the first £30k of the settlement payment is usually free of tax and NI deductions).
Most settlement agreements provide the employee with an ex-gratia payment (also called a compensation payment). This sum is one of the reasons why most employees agree to a settlement package. Employers will often pay an ex-gratia payment to avoid being sued at an employment tribunal, especially where they have likely treated the employee poorly, but this is not always the case.
When are settlement agreements used?
There are a range of scenarios in which settlement agreements are used. An employer commonly offers a settlement agreement when a person’s employment is ending. Typically, settlement agreements are used where an employee:
- Is being made redundant (either on a voluntary or compulsory basis)
- Claims that they have been harassed or bullied at work
- Has a potential discrimination claim
- Has been underperforming or is guilty of gross misconduct.
While they are most commonly used to end an employment relationship on agreed terms, in some cases – and where the relationship is still salvageable – settlement agreements can also end workplace disputes without terminating the employment relationship.
However, ACAS warns employers against relying on settlement agreements too much. Not all employment disputes can be resolved by a settlement agreement and employers should not rely on them as an alternative to good management.
In many cases, an employer will use a settlement agreement to prevent an employment claim from being made against them. But businesses cannot use settlement agreements to stop all claim types.
Type of claims where a settlement agreement can be used:
Claims where a settlement agreement cannot be used:
If an employee signs a settlement agreement that includes a confidentiality clause, employers should be aware that there are limits to what they can legally gag. A confidentiality clause may be deemed unenforceable and void if it prevents an employee from whistleblowing.
What are the benefits of a settlement agreement?
Employment disputes can be upsetting and traumatic. But settlement agreements can help employers and employees make a clean break and move on. They also help to protect the best interests of everyone involved and provide certainty about what happens next in relation to any employment dispute, without having to worry about what the court will decide.
Benefits for employees:
- Helps to avoid the delays and stress of an employment tribunal
- Helps them leave their employment on favourable terms
- Provides security through a financial payment that tends to be better than the
amount they would be entitled to by law
- Provides a tax-free payment
- Empowers them to negotiate things they might not obtain via litigation (e.g. an employment reference).
Benefits for employers:
- Can provide a swift end to an employment relationship that is not working
- Helps to avoid legal costs should a case become litigious
- Helps to avoid having to pay larger sums at an employment tribunal
- Helps to protect the reputation of their businesses
- Prevents employees from making adverse and derogatory comments
- Prevents employees from using their conversations against them should the dispute become litigious.
What's typically included in a settlement agreement?
The financial details
The settlement contract will establish what payments the employee is entitled to under their employment contract (e.g. salary, notice, holiday pay, bonuses, pension etc). Details about any ex-gratia payment will also be included in the settlement agreement.
The settlement agreement will also indicate when the employer will pay the employee.The first £30,000 of this ex-gratia payment (or compensation) is usually free of tax or national insurance contributions. The agreement is also likely to include an indemnity which makes the employee liable for any tax and NI payments should HMRC later decide these should have been paid.
If the employment is being terminated, the settlement agreement will set out the termination date, the reason for the termination, and any notice period (and whether the employee will have to work this or not).
Obligations on the employee
The settlement agreement will establish what is required by the employee. This might include returning company property and adhering to any pre-existing or new restrictive covenants.
One of the most critical aspects of the settlement agreement is the ‘waiver of claims’ which prevents an employee from bringing future claims against the business. Including a non-derogatory clause in the settlement agreement also prevents employees from making disparaging remarks about their employer.
Other clauses in the settlement agreement could force the employee to come clean if there are any circumstances which would have permitted their employer to dismiss them without notice. Employees may also have to declare any new job offers, as these could impact the final payment amount.
Obligations on the employer
As well as details about the payment to be made by the employer, the settlement agreement should establish whether the business will provide a favourable or factual job reference to the employee. Employers are also usually prevented from making insulting remarks about the employee due to a non-derogatory clause.
Are settlement agreements legally binding?
A settlement agreement is a legally binding document. However, several conditions must be met before it is granted this status. For example:
- The agreement must be in writing
- The agreement must relate to a particular complaint or proceedings
- The employee must have received advice from a relevant independent adviser on the terms and effect of the proposed agreement
- The independent adviser must have a current contract of insurance or professional indemnity insurance covering the risk of a claim by the employee in respect of loss arising from that advice
- The agreement must identify the adviser
- The agreement must state that the statutory provisions which set out the above conditions regulating the validity of the settlement agreement have been satisfied.
All of the above conditions must be met, and settlement agreements may be declared void if they are not.
There are other reasons why a court might not uphold a settlement agreement. For example, if there are allegations that the employee agreed to the deal due to pressure being applied. A court may also deem confidentiality clauses unenforceable and void where a settlement agreement has been used to prevent an employee from whistleblowing.
Expert legal advice is needed to ensure any settlement agreements stand up if challenged. For the best legal advice and representation, contact our settlement agreement lawyers today on 020 7467 3980.
ACAS and settlement agreements
The Advisory, Conciliation and Arbitration Service (ACAS) helps employers and employees reach amicable solutions to their employment disputes through free and independent legal advice.
Acas has issued a Code of Practice on settlement agreements. This Code sets out the best practice process for settlement negotiations. Crucially, Acas recommends that employers give employees 10 calendar days to consider any offers made (this can be less if there is a justifiable reason). If an employer does not follow the Acas Code of Practice, it may have to explain its reasons for not doing so.
Acas also sets out what it considers “improper behaviour” in settlement agreement negotiations. This behaviour includes putting undue pressure on employees to agree to any offers made. All forms of bullying, harassment and intimidation are also considered improper.
Employers and employees can use the templates provided by Acas to help them reach a settlement agreement. Acas also offers early conciliation to help resolve employment disputes. When Acas considers a case, a conciliation officer will listen to both sides of the argument and try to get both parties to reach a settlement.
Of course, this means that Acas is not on either party’s side. On the other hand, if you use your own settlement agreement solicitor to negotiate your deal, they will work with you to ensure that the terms are as favourable to you as possible – while still meeting the requirements of the Acas Code.
What if a settlement agreement is not reached?
If both parties cannot reach an agreement, it might be possible to progress the matter to an employment tribunal. Employees must attempt to negotiate early conciliation via Acas before proceeding to litigation (although some claim types are exempt).
An employment tribunal is chaired by a judge, with a panel of non-legal specialists hearing the issue. To keep on the right side of the tribunal, employers must follow all the latest disciplinary and grievance procedures best practices. In particular, they must keep written records of all employment decisions and ensure that all conversations and meetings are correctly recorded.
Do I need a settlement agreement lawyer?
Employees are legally required to take independent legal advice on any settlement agreement presented to them. The employer will usually pay for this. This independent adviser can be:
- A qualified lawyer
- A certified and authorised officer, official, employee or member of an independent trade union
- A certified and authorised advice centre worker.
The adviser cannot be employed by, acting for, or connected with the employer.
Employers also need legal advice to ensure they follow the correct rules and processes. For example, a specialist settlement agreement solicitor will advise on any reasonable adjustments that may be required before an employee can be dismissed.
An expert settlement agreement lawyer will also advise on the merits of each case and establish what the employee would likely receive should the matter get to an employment tribunal. The solicitor will also ensure that the compensation awarded is fair, that your rights are protected, and that everyone understands what they are agreeing to when they sign the settlement agreement.
Our settlement agreement fees
Expert settlement agreement lawyers, we offer a range of flexible payment options, including retainers, fixed fees, and hourly rates. We also provide a fixed price, no-obligation initial consultation on all employment law matters.
For employees, our fee for negotiating a settlement agreement is usually around £500 to £750. Your employer typically pays our fee’s so there is no cost or financial risk to you.
For employers, our fees are as follows:
- Advice only. £750 to £5,000 plus VAT depending on time spent on the matter and the complexity of your issue
- Negotiating a settlement. £3,000 to £15,000 plus VAT
- Preparing for an employment tribunal. £10,000 plus VAT for a short simple claim and up to £50,000 or more plus VAT for longer more complex claims.
Settlement Agreement Solicitors – FAQs
- There is no one fixed amount when it comes to settlement agreements. An employment lawyer will help you to establish what is reasonable and fair in your particular case. The final amount is likely to include a compensation payment (tax-free up to £30,000), in addition to notice payment, salary, bonuses, commission, and pension contributions due.
- Your settlement agreement solicitor will also advise on how much may be awarded should the case come before a tribunal or a court. The solicitor will use this information to advise on what is a good offer. In addition, if there are any restrictive covenants, the value of these should be considered when considering the fairness of any amount offered in a settlement agreement.
- Any ex-gratia/compensation payment. The first £30,000 of which is not taxable*
- Payment in lieu of notice (PILON) which is taxable
- Post-Employment Notice Pay (PENP) which is taxable
- Any salary due which is taxable
- Any holiday pay due which is taxable
- Statutory redundancy payment which is tax-free (this payment is capped)
- Contractual redundancy payment – this is tax-free under £30,000*
- Payments for agreeing to restrictive covenants which are taxable.
- The contents of a settlement agreement differs from case to case. However, standard clauses found in settlement agreements cover items such as:
- The compensation and other payments
- The employer’s contribution to the employee’s legal fees
- A waiver of claims
- Restrictive covenants
- Confidentiality clauses
- Most settlement agreements will include a confidentiality clause. The clause usually prevents employees from discussing the terms of the arrangement. But there are often limited exceptions, such as close family members and advisers, and where employees are required to disclose by law.
- In some cases, the confidentiality clause might also prevent an employee from sharing the circumstances that led to their termination. However, provisions are often made so that the employee can discuss matters with prospective employers (in general terms).
- However, as it stands, according to the UK government, “confidentiality clauses, or NDAs, cannot prevent an individual from reporting wrongdoing in the public interest, known as making a protected disclosure or ‘whistleblowing’. These could include a criminal offence, danger to health and safety, or failing to comply with a legal obligation.
- Even if an employee signed a settlement agreement that stated they were not allowed to become a whistleblower, the confidentiality provisions would be unenforceable.
- A protected conversation or any discussions that precede with the phrase, “without prejudice”, cannot be admitted as evidence at any subsequent tribunal or court proceedings.
- This protected status helps both parties to have honest and open communications without fear of legal repercussions. Basically, a protected conversation is an off-the-record conversation. However, some exceptions apply, for example, in discrimination or whistleblowing cases.
- Yes, an employer can withdraw a settlement agreement at any stage before both
parties sign the binding agreement
- An employer cannot force an employee to accept a settlement agreement. And if an employee chooses not to sign, their employment rights – including the right to pursue a claim – remain.
- Some employees refuse to sign settlement agreements because they don’t feel the terms are acceptable. Others do not sign because they believe they are being discriminated against. But an employee can also refuse to sign just because they do not want to.
- While each case is unique, in most instances, employers offer employees around one to four months’ gross salary as an ex-gratia payment (in addition to any notice pay, holiday pay etc. due). However, in some cases – including where there have been serious cases of harassment or discrimination – this figure could be much higher.
- When deciding how much to offer, employers will typically consider the following:
- The employment contract (remuneration, notice period and untaken annual leave)
- The length of the employee’s employment
- How long it could take, how complicated it could be, and how costly it could be to resolve the problem if a settlement is not reached
- How difficult it might be to fill the employee’s post
- How long it might take the employee to find another job
- The reasons for offering settlement.
- There is no average settlement agreement amount in the UK, as each employee earns a different salary. The amount offered in a settlement agreement will depend on the specific circumstances. The amount could be as little as one month’s salary (plus notice pay) or substantially more. In most cases, the compensatory element of the payment is around two to three months’ gross salary.
- The payment offered is usually better than the amount an employee is entitled to by law, but less than the employer would have to pay if the case went to court. Any employment solicitor experienced in negotiating settlement agreements will have a good understanding of what an employee should expect to be paid given their circumstances and the details of their case.
- In most cases, employers will contribute towards their employees’ legal costs when negotiating a settlement agreement. This contribution often covers the employee’s fee in full. While there is no obligation for the employer to pay for this legal advice, most choose to as it is in their best interests to ensure that the settlement agreement is legally binding.
- If the employee breaches the settlement agreement
If the breach occurs before any money is exchanged, the employer might be able to withhold this payment. If payment has already been made, the employee might be forced to repay all or some of the money they received. Depending on the nature of the breach, the employer might also be able to sue the employee for damages.
- If the employer breaches the settlement agreement
The employee might be able to bring a breach of contract claim for damages against the employer.
Reasons to trust Summit Law
To save time, disruption, and costs – we strive for a swift resolution of all employment disputes. We provide a fast and professional turnaround on settlement agreements to let all parties move on to the next chapter. Where you and the other side cannot reach an agreement, our highly skilled employment solicitors know what it takes to get a successful conclusion at court or employment tribunal.
Maximise your entitlement
Because we are employment law experts, we know what it takes to get the best possible deal for you. Working for employers and employees alike, we anticipate the other side’s moves and use this knowledge to your advantage.
Specialist employment law solicitors
We specialise in providing employment law services to employers, senior executives, directors, and employees. Through expert legal advice, support, and representation, often on complex issues, our team assists with both contentious and non-contentious matters.
Unrivalled client care
Our settlement agreement lawyers put our clients’ needs front and centre with a personal and sympathetic touch. Our Lexcel Accreditation status recognises this commitment to client care and we are also regulated by the SRA.
Contact our settlement agreement lawyers today
At Summit Law, our settlement agreement lawyers have everything it takes to advise and guide you through the legal dispute process. And in addition to resolving employee/employer quarrels, our considered and sensitive approach stops them from escalating.
Getting to know you and your legal needs, our highly experienced lawyers are always on your side. So if you need help with a settlement agreement, we are here to remove the burden from your shoulders with minimal disruption.
With all the expertise, skill and legal insight needed to handle requirements, get in touch with our settlement agreement lawyers today by calling on 020 7467 3980 or complete our free online enquiry form.