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Settlement Agreements in Employment Law

on November 6, 2017 Comments Off on Settlement Agreements in Employment Law

Our employment law team is experienced in negotiating terms and advising on settlement agreements. Our expert employment law solicitors work with our clients to ensure the best possible outcome.


What is a Settlement Agreement?

Settlement Agreements are used to conclude a workplace dispute between employee and employer and/or terminate an employment relationship. The effect of signing a valid Settlement Agreement is that an employee waives the right to pursue any type of claim named in the agreement against the employer in a Tribunal or a Court.  A Settlement Agreement is a legally binding contract between the employer & employee.

The benefits of a Settlement Agreement for employee and employer

The key benefit that a Settlement Agreement offers an employee is the peace of mind that the terms of termination are clearly set out within the contract. These terms could include the guarantee of a financial payment or job reference.

A Settlement Agreement also provides an employer with the assurance that no future claim will be brought by the employee in the Tribunal or the Court. Even where no dispute has arisen and an employment relationship ends amicably, employees and employers often enter into Settlement Agreements as these agreements offer a definitive clean break.

Why would an employer offer a Settlement Agreement?

During or after employment, an employer may offer a Settlement Agreement for many different reasons. These include the following:

  • to terminate a contract on terms mutually agreed with an employee;
  • to avoid following costly and time-consuming processes such as a redundancy process;
  • to bring to an end a workplace dispute with an employee; and
  • to prevent an employee from bringing any future claims against that employer.

Does an employee have to accept a Settlement Agreement offer?

In some cases, an employer may unexpectedly offer an employee a Settlement Agreement. There is no obligation to accept a Settlement Agreement and an employee should seek independent legal advice before accepting or signing any Settlement Agreement presented to them. In order for the agreement to be legally binding, an employee must have sought this independent legal advice.

The Code of Practice on Settlement Agreements issued by ACAS (Advisory, Conciliation and Arbitration Service) recommends that an employer allow an employee 10 calendar days to decide whether or not to accept any Settlement Agreement. The ACAS Code of Practice on Settlement Agreements is not legally binding, however if an employer does not follow the recommendations set out in the Code they would be required to justify why they chose not to.

Call us on 01753 592 000 to get independent advice before signing a Settlement Agreement

Clauses in a Settlement Agreement

A Settlement Agreement will usually include clauses relating to the following:


a) Date

This clause will set out the termination date that has been agreed.

b) Reason

This clause usually will be stated as ‘mutual agreement’, however in some cases there may be a specific reason which will be stated, for example, redundancy.

2. Payments

a) Compensation for loss of employment

If your employer is paying you compensation, a clause will be included setting out when such payment will be due to you and the tax status of such payment. Currently, a compensation payment of up to £30,000 can be paid to you without deductions for tax and NI contributions.

b) Your salary and benefits

This clause will normally set out any payments and benefits that you will receive up until the date of termination. These could include; your normal salary, any accrued but untaken holiday pay, expenses which may be owed, bonus payments and pension payments.

3. Tax indemnity

This clause sets out that in the event that HMRC decides that insufficient tax has been paid and recovers this from your former employer, you will reimburse your former employer for the amount sought.

4. Notice

This clause will typically state what notice you are entitled to and whether you are required to work your notice, remain at home on garden leave or whether you are being paid in lieu of notice (PILON). A PILON payment is where your employer pays for the time period equivalent of the employee’s notice period but the employee is not required to attend work.

5. Pension

Until the date of your termination, any payments towards your pension should continue.

6. Waiver

This clause is included as your former employer will want to make sure that you cannot bring any claims against them in the future. The claims being waived will usually be listed within this clause. However, you are unable to waive your right to enforce the terms of the settlement agreement, your accrued pension rights or any personal injury claims of which you are not aware of at the time the agreement was made.

7. Warranties

Usually, you will warrant that you have not been guilty of any misconduct which could entitle your employer to dismiss you without payment of notice.

8. Reference

There is no obligation on your former employer to provide a job reference for you. Therefore, a clause should be included within the settlement agreement so that your former employer is bound. In certain circumstances, the wording to be included in the reference can be agreed and appended to the settlement agreement.

9. Confidentiality & non-derogatory comments

It is standard practice that a settlement agreement will include a clause that requires you to keep the terms of the agreement as well as the circumstances surrounding your termination confidential. When agreeing the terms with your employer you should ensure that you are able to discuss the settlement agreement with your immediate family or spouse and professional advisors.

This clause is usually included to ensure that you cannot make any derogatory comments about your former employer to anyone. You should ensure that your former employer, including retained employees, cannot make any disparaging comments to third parties about you.

10. Restrictive covenants

This clause is likely to reaffirm any post-termination restrictive covenants that you are subject to as stated in your contract of employment. Any restrictions set out in the settlement agreement should be checked to ensure they are no more onerous than the original terms contained in your contract.

<11. Whistle blowing

You may not waive your right to make a claim under whistle blowing legislation.

12. Breach of the settlement agreement

Should you breach the settlement agreement, you may have to repay some or all of the payments made by your employer. The costs will be indemnified to avoid you from recovering future payments.

13. Legal fees

As a gesture of goodwill most employers agree to pay a contribution towards you receiving legal advice in relation to the settlement agreement. Where possible, the employment team at Fitz Solicitors will cap its fees to this contribution for straightforward matters so as that the employee is not further out of pocket at a difficult time.

14. Entire agreement

This means that any prior agreement which is not incorporated into the settlement agreement document cannot be relied upon when signing the new agreement. Therefore, the settlement agreement must contain all the agreed terms between the employee and the employer.

Primal LaxmanSettlement Agreements in Employment Law