A settlement agreement is a legal document used to resolve disputes or potential claims between employer and employee. Settlement agreements require the employee to seek independent legal advice before signing.
Table of Contents
- What is a settlement agreement?
- What does a settlement agreement cover?
- Is a settlement agreement a good idea?
- What are the legal requirements of a settlement agreement?
- Why would I be offered a settlement agreement?
- What do I do if offered a settlement agreement?
- Can you counter offer a settlement agreement?
- Can you terminate a settlement agreement?
- What happens if you reject a settlement agreement?
- What happens if I break a settlement agreement?
- What is considered a good settlement?
- What is a reasonable settlement agreement?
- How much should I ask for?
- What is a reasonable full and final settlement offer?
- Do I need a solicitor for a settlement agreement?
- How much do solicitors charge for a settlement agreement?
- Who pays the legal fees?
- Are settlement agreements tax free?
- How long does a settlement agreement take?
- Contact Us
What is a settlement agreement?
A settlement agreement is a legal document between an employer and employee. It is most often used when the employee’s employment is being terminated. For example, in redundancy and re-structuring cases, underperformance by the employee or in cases of “mutual agreement” , perhaps following a protected conversation.
The employer will draft the agreement. This may be following negotiations held between the parties. Once received, the employee may wish to negotiate the terms individually. Alternatively, the employee may instruct a solicitor to review the terms and negotiate on their behalf.
Independent Legal Advice
Settlement agreements require the employee to seek independent legal advice before signing. This ensures they understand their rights and the implications of the agreement. The employer will usually offer a contribution toward the employee’s legal fees.
If you choose to instruct us to assist with your Settlement Agreement, your matter will be handled by Michael Scutt. Michael has been an employment lawyer for nearly 20 years . He is committed to helping clients resolve their employment issues in a practical, clear and constructive way. You can find out more about Michael and the team here.
What does a settlement agreement cover?
A settlement agreement typically includes the following:
- a provision that the employee agrees not to pursue any legal claims against the employer for any claims arising during the employee’s employment or the termination thereof.
- a specific termination date and reason for termination.
- the financial compensation package that the employee will receive as part of the agreement.
- A confidentiality clause restricting the parties from disclosing the terms of the agreement or the employee from disclosing confidential information about the employer’s business, finances, customer lists and so on.
- a clause that requires the employee to return any company property in their possession. For example, items like laptops and phones as well as any of the employer’s confidential information or intellectual property eg stored on USB sticks or hard copies
- a provision that prevents the employee and employer from making negative statements about one another.
- It may contain restrictive covenants such as to impose timeframes in which the employee must not enter into employment with a direct competitor or solicit clients.
- A reference by the employer. It will usually be a factual only reference.
Is a settlement agreement a good idea?
It is important to consider the specific circumstances and the goals of both the employer and employee. However, a settlement agreement may be appropriate for many reasons.
For example, if there is a dispute and the relationship between the employer and employee has broken down. Assuming both parties are willing to negotiate to reach a mutually satisfactory resolution and achieve a clean break, a settlement agreement would most definitely be a good idea. This is because a settlement agreement would provide certainty and finality for both parties.
Nonetheless, even in situations where there is no dispute between the parties, a settlement agreement is still a good idea for the employer to formalise the terms of departure.
What are the legal requirements of a settlement agreement?
To be legally binding, the settlement agreement must;
- be in writing
- clearly state the claims being waived by the employee, and
- ensure the employee has received independent legal advice regarding the terms of the agreement.
At what point is a settlement agreement legally binding?
The settlement agreement will become legally binding when:
- both parties have signed the document
- an independent solicitor has certified that they have advised the employee on the terms of the agreement.
Before this point, the agreement is not legally binding and can be amended or withdrawn at any time.
You can find out more about settlement agreements on the ACAS website.
Why would I be offered a settlement agreement?
An employee may be offered a settlement agreement by their employer to ensure a clean break between the parties and prevent the Claimant from issuing a claim at the Employment Tribunal or in court.
The employer may be offering a compensation package that is in excess of the employee’s statutory entitlements and wants the security provided by a settlement agreement.
Alternatively, the employer may wish to terminate the employee’s employment where the employer is dissatisfied with the employee’s performance but they do not wish to pursue a formal disciplinary process.
A settlement agreement is also commonly used in redundancy situations or by mutual agreement.
What do I do if offered a settlement agreement?
If you are offered a settlement agreement by your employer, it is important to take independent legal advice on the terms of the agreement. You should consult with a solicitor who has experience advising on settlement agreements. This can help if any complex legal issues arise.
If you are offered a settlement agreement, you should also:
- check that any payment in lieu of notice (PILON), any accrued but untaken holiday payment or any other contractual benefit is correctly calculated
- check if provision has been made for payment of bonus or release of any long-term incentives eg share options or restricted stock.
- check carefully to see whether any restrictive covenants are imposed or re-affirmed by the settlement agreement – for instance a non-compete clause which might prevent you from working for a competitor.
Can you counter offer a settlement agreement?
A settlement agreement only becomes legally binding when signed and you have taken independent legal advice. There is nothing to stop an employee from trying to negotiate the financial package or terms of the agreement. However, whether the employer will agree depends on the relative strength of the parties’ negotiating positions. An employment solicitor can advise and assist on this.
Can you terminate a settlement agreement?
Once the settlement agreement has been signed by both parties, it becomes legally binding. This cannot easily be set aside or varied unless both parties agree.
If either party breaches the settlement agreement, then the other party has the right to bring a claim for breach of contract.
What happens if you reject a settlement agreement?
There is no obligation to accept a settlement agreement as it is entirely voluntary. However, careful consideration should be given to the alternative. For instance, in a redundancy situation, the employer might simply offer a statutory redundancy payment as opposed to an enhanced one. Similarly, following a protected conversation, the employer might institute a performance improvement or disciplinary process.
An employee with a claim for unfair dismissal or discrimination might issue proceedings at the Employment Tribunal or court if the employer does not offer acceptable terms.
If terms of the agreement cannot be reached, then it may be beneficial to seek legal advice as to what options are available to you. Please contact Michael Scutt on 01707 329333 or email firstname.lastname@example.org if you require advice on this.
What happens if I break a settlement agreement?
If the terms of the agreement have been breached, then you may be liable for breach of contract.
It is important to seek legal advice if you find yourself in this situation.
What is considered a good settlement?
Generally, a good settlement is one which:
- Offers a reasonable financial incentive
- Imposes reasonable obligations on the employee to allow for a clean break
- Releases the employee from onerous restrictive covenants
- Allows the employee to resume their career elsewhere without hindrance.
This is why it is vital to receive good independent legal advice as to how the terms of the agreement will affect you.
All a settlement agreement does is record the commercial deal reached between the parties and formalises it. Therefore, to ensure that your interests are protected, you should seek advice from a solicitor. An employment solicitor can advise you on the strengths and weaknesses of your position. From there they can advise you on what you may realistically expect to achieve from the settlement agreement.
What is a reasonable settlement agreement?
gives the employee sufficient time to consider the terms of the offer.
ACAS guidelines stipulate that the employee should have ten days in which to consider a settlement agreement and take legal advice.
Both parties should be clear on the reasons behind the agreement. Employers should give employees the opportunity to ask questions and make counter offers if they so wish.
An employee with a strong claim (for example, unfair dismissal) is more likely to achieve a better offer than one whose case is weak or non-existent.
How much should I ask for?
This will differ from employee to employee. Factors such as length of service and reasons for termination will need to be considered. This will determine how much financial compensation should be awarded to the employee.
What is a reasonable full and final settlement offer?
This very much depends on the individual’s situation. Settlement agreements are not one-size-fits-all. Consequently, other factors will be considered as a whole. For example, why the agreement is being drawn up and any employee benefits.
Do I need a solicitor for a settlement agreement?
Yes, it is a fundamental requirement that the employee receives independent legal advice from a solicitor or other suitably qualified person. This ensures the agreement is legally binding. Please contact Michael Scutt on 01707 329333 or email email@example.com if you require this advice.
What does the solicitor do?
Your solicitor will:
- review the document and explain each clause to you. This gives you the opportunity to ask any questions.
- explain how the figures contained within the settlement agreement have been calculated and check that you are in agreement.
- review any contract of employment alongside the settlement agreement to check that they are not in conflict with one another.
- negotiate on your behalf and assist in the negotiation process with your employer to agree more desirable terms if you are unhappy with the original offer.
How much do solicitors charge for a settlement agreement?
Fees may vary depending on the nature of the settlement agreement.
At Crane & Staples, we offer reasonable rates. An estimate of our fees is below:
- Review, advice and signing – from £500 + VAT.
- Negotiation of terms, review and signing – from £750 + VAT.
Who pays the legal fees?
It is common practice for the employer to contribute towards the legal fees. Usually, this covers the cost of the solicitor explaining the agreement to you and signing the advisor’s certificate as evidence that you have received appropriate advice and understood the terms of your agreement.
If the legal bill exceeds the employer’s contribution, then the additional amount will usually be payable by the employee.
Should you require your solicitor to negotiate the terms of the agreement, or do anything further than simply providing advice and signing it, then it is unlikely your employer will cover these additional fees. These fees will usually be payable by the employee.
Are settlement agreements tax free?
A settlement agreement may include a non-contractual payment to the employee of up to £30,000 free of income tax and employees’ national insurance contributions for loss of employment.
Notice pay and holiday pay are subject to tax and national insurance.
It may be possible, depending on the employee’s particular circumstances, to make a lump sum contribution into their pension scheme without deductions for tax being made on the payment. The employee should take independent financial advice before doing so.
Most settlement agreements will include a tax indemnity clause. This requires the employee to indemnify the employer by paying for any excess tax which HMRC deem should have had tax deducted at source.
How long does a settlement agreement take?
This will vary depending on the circumstances. However, ACAS guidance says that employees should have a minimum of 10 days to consider the offer.
At Crane & Staples, it usually takes about one hour to explain the terms of the agreement to an employee. We can take this meeting either in-person or online, via Microsoft Teams or Zoom.
When will you receive your Settlement Agreement money?
The time it will take to receive your money will be specified within the terms of the agreement. Payment will usually follow the termination of your employment.
If you are an employer looking to draft and invite an employee to consider a settlement agreement or an employee in receipt of one, we would be pleased to help you.
We look forward to hearing from you.