What is a settlement agreement? 

A settlement agreement is a contract between an employee and an employer to record how the terms of employment will end or a dispute will be resolved. Those terms are usually that the employer will pay a sum of money in return for the employee giving up rights to make the employment-related claims set out in the agreement. 
 
An agreement is a sensible way of resolving a dispute, but it is important that you seek legal advice. There are rules for settlement agreements and if you fail to follow them, the arrangement will be unenforceable. 
 

Settlement agreements for employees 

If you are an employee, our employment solicitors help you understand the meaning and effect of the settlement agreement and its implications for your legal rights. 
 
Your employer will almost always offer a contribution towards your legal costs for advice. In most cases, this contribution is enough to cover the cost of the work we do. This does not mean that we have any obligation to your employer. If we are instructed by you, we are your solicitor when giving advice, not your employer’s. It doesn’t matter who pays for the advice. 
 
If you are not happy with the terms of the agreement, we can negotiate these for you. Your employer would not cover the cost of this work but, if successful, the improved terms are likely to cover the cost. Negotiation is charged at our hourly rate.  

Settlement agreements for employers 

If you are an employer, we will make sure you meet your legal obligations and help you to reach an agreement that works for your business.  
 
Our employment solicitors prepare bespoke settlement agreements for your case and advise on how best to protect your interests. This includes advice on the amount of the settlement if a payment is to be made, and how to ensure that the agreement achieves everything you want it to. 
 
If your employee wishes to negotiate the terms of the agreement, we can represent you in discussions.  
 
 
 
 

When are settlement agreements used? 

To end a disagreement between an employer and an employee at the end of employment. 
To reach a negotiated compromise about how and on what basis an employee will leave. 
Settlement agreements are becoming increasingly common in redundancies.  

What are the rules on settlement agreements? 

The settlement agreement must be in writing 
The settlement agreement must contain certain information stipulated by law 
An employee must receive advice on the meaning and effect of the settlement agreement by someone qualified to do so such as Spencer Shaw Solicitors 
The advice must include the effect of the settlement agreement on an employee’s ability to make a claim to an employment tribunal. 

Settlement Agreement FAQs 

Should I sign a settlement agreement? 

Settlement agreements can be a positive way to resolve a dispute. It ensures that both parties’ interests are met as far as possible, and avoids the time, cost and stress of an employment tribunal. However, a one-sided or poorly drafted settlement agreement may not be in your interests, and so you should not feel obliged to sign it. 
 
There are several factors to consider before signing a settlement: 
 
The payment – settlement agreements often come about when an employee may have a claim under employment law but agrees not to make it in return for compensation. You should therefore consider whether the amount is reasonable in comparison to what you may have received from a tribunal. Bear in mind that you can never be 100% certain you will succeed at tribunal, and any potential compensation is not guaranteed. In other cases, an agreement may be offered where there has been a breakdown in relations or a redundancy situation. Here, you might consider the circumstances of the breakdown, the amount you are entitled to in statutory redundancy pay, or how long it will take you to find another job. 
The terms – settlement agreements are a way to resolve all sorts of matters, aside from compensation. Agreements may vary widely but can include confidentiality clauses that stop you discussing the dispute or terms of settlement, non-competition clauses that will limit what you may do after employment ends or other restrictions. There may also be terms beneficial to you, aside from the payment, such as a positive reference. You must think carefully about whether the extent of the restriction is practical and fair, the benefits to you, and how these balance against the payment offered. 
The alternatives – If you cannot reach an agreement and the underlying issue is a dispute with your employer, the case may proceed to tribunal. You should consider the time, cost and emotional investment required for a tribunal claim. It may be worth accepting a reasonable offer in order to avoid a tribunal. 
Negotiation - If you are willing to reach an agreement, but aren’t happy with the terms offered, we can help you to attempt to renegotiate the terms. This will usually be quicker than a tribunal claim. Your employer is unlikely to pay for a solicitor to undertake this work, but the improved terms may cover the cost involved. 
 
It is a legal requirement that you receive legal advice before signing a settlement agreement, and in most cases your employer will cover the cost of this advice. We will explain the terms of your agreement and their practical impact on you. We can also help you to consider the factors discussed above and advise on how strong your case would be if you are considering a claim to an employment tribunal. 

How long should I have to consider a settlement agreement? 

Parties to the agreement must be given a ‘reasonable time’ to read the agreement and receive advice. What is reasonable will depend upon the circumstances. ACAS recommends that someone offered an agreement should be given at least 10 days to receive advice and consider the terms of the agreement, unless both agree otherwise. 
 
If an employer does not give the employee a reasonable amount of time to consider the proposal, there may be adverse consequences for the employer. 

How do I negotiate a settlement agreement? 

If you aim to negotiate a settlement agreement, it is important to research beforehand. You should have a clear idea of what you hope to get from the agreement. Set yourself a range from ‘best possible outcome’ to ‘minimum acceptable’. Be realistic – an agreement is often a compromise to resolve a dispute outside of court, so it is unlikely both parties will get everything they want. You should only sign an agreement you are happy with, but you should also be willing to acknowledge when you have a good deal – you don’t want to push too far and lose the option of a beneficial agreement. 
 
Advice from a suitably qualified solicitor will give you a good idea of the compensation you could expect if your claim is successful. Remember that you are unlikely to get as much from a settlement as at a tribunal, but a tribunal win is never guaranteed. Also bear in mind the cost, time and emotional investment involved in going to tribunal, weighed against an agreement that may offer less financially, but gives you closure. 
 
The easiest way to negotiate a settlement agreement is to employ a solicitor to act on your behalf. An experienced solicitor, such as Spencer Shaw Solicitors, will know the appropriate level to pitch offers and counter offers, how to engage with the other party’s solicitor 
 
Having an expert act on your behalf offers peace of mind. Although your employer will not cover the cost of negotiating, the gain from an improved settlement agreement will often cover the cost. 
 
We charge an hourly fee for negotiating agreements 

How long does a settlement agreement take? 

The recipient of an agreement must be given a reasonable time to read the agreement and receive advice on it. What is reasonable will depend upon the circumstances. ACAS recommends that parties should be given at least 10 days to receive advice and consider the terms of the agreement, unless both agree otherwise. 
 
If the parties are willing an agreement can be concluded quickly. 
 
If you intend to negotiate your agreement, this will take a little longer. The exact time will depend upon how easily you reach an agreement, and how quickly both sides respond in general. 

Can you change a settlement agreement? 

A settlement agreement has to be just that - an agreement. If your employer has suggested a settlement agreement but you aren’t happy with the offer, you are entitled to propose changes to its terms. Your employer does not have to agree to changes, but this is where expert help with negotiation can be helpful. 
 
Once a settlement agreement has been signed, it is binding and cannot be changed, except by agreement between the parties. 

When does a settlement agreement become binding? 

A settlement agreement becomes binding when it is signed by both parties. 

Does a settlement agreement need to be witnessed? 

No, a settlement agreement does not legally need to be witnessed, though some employers prefer to have a witness as added verification. 

What should a settlement agreement include? 

The contents of the agreement will depend upon the parties involved, the relationship, and the issues that are being resolved. It must be specific about the particular claims that are being settled. A general catch all provision will not be sufficiently precise to be effective. 
 
The agreement should cover the responsibilities of both parties to uphold the agreement. For example, it may state that the employer will make a specified payment and offer a positive reference while the employee will waive any employment claims and agree to keep the matter confidential. 
 
It is helpful to include details of how the payment figure has been reached, as there may be tax implications arising because of the agreement. 
 
If the agreement is being made to end the employment relationship, it should detail how this will be done. For example, will the employee work their notice, or will the relationship end immediately? 

Can a settlement agreement be overturned or appealed? 

Settlement agreements must follow certain rules in order to be enforceable. Agreements that do not meet these requirements will not be enforceable. 
 
Aside from these rules, there is no right of appeal for an agreement. This makes it even more important that you receive legal advice before signing a settlement agreement. An agreement is by mutual consent, and so you should not sign an agreement that you are unhappy with. 

What happens if I refuse to sign a settlement agreement? 

Settlement agreements must be entered into willingly. You should not feel pressured to enter an agreement that you aren’t happy with. 
 
If you don’t enter into an agreement there should be no adverse consequences for you just because you didn’t proceed with the agreement. 
 
We can help you to negotiate the terms of your settlement to try and reach a satisfactory agreement with your employer. 

What is a reasonable amount to get in a settlement agreement? 

This will depend upon several factors and may vary from case to case. It may also vary from person to person. When assessing a settlement agreement, you might consider: 
 
The salary or wage and any other benefits you are giving up. 
Notice period and untaken leave. 
How long you have worked for your employer. 
In agreements relating to a dispute, does the settlement resolve the issues to your satisfaction? 
The time, costs and emotional resources involved in taking the case to tribunal if you cannot reach an agreement. 
How difficult it will be to find another job. 

Do employers have to pay legal fees for settlement agreements? 

Employers are not legally obliged to contribute, but it is extremely rare that they do not. 
 
Most employers contribute towards the cost of advice for employees entering into a settlement agreement. The standard contribution offered by employers is usually enough to cover advice about the meaning and effect of the settlement. 
 
Employers will usually not pay for the cost of any negotiations about terms. 

Can a settlement agreement be rescinded or withdrawn? 

Once an agreement is signed, it becomes legally binding on both parties and cannot be altered without agreement on both sides, usually in writing. 
 
A settlement agreement may be withdrawn at any point before it is signed. This is most likely to be the case when circumstances change before signature. 
 
It is unusual for an employer to make and then rescind a settlement offer without a good reason. 

Are settlement agreements confidential? 

Settlement agreements often include confidentiality clauses, also known as non-disclosure agreements (NDAs) which make the agreement, its terms and the circumstances leading up to it confidential. 
 
Settlement agreements often include provisions dealing with the employer’s confidential information, and so restrictions may be imposed on what use may be made of it. 
 
Confidentiality clauses may not be used to prevent or discourage ‘whistleblowing’ - making a protected disclosure in the public interest. Any clause that attempts to prevent whistleblowing will be unenforceable. 
 
All employees should receive legal advice before signing a settlement agreement. This advice will include the impact of any non-disclosure agreement. 
 
Given controversy around such clauses, we would strongly advise businesses to seek legal advice before including such a clause in an agreement, to ensure that you use the clause correctly and ethically. 
 

Can an employee ask for a settlement agreement? 

Yes. An employee can request a settlement agreement to resolve a dispute or issue at work, but usually the process is instigated by the employer. 
 
During an ongoing dispute, an employee may suggest the terms on which they would be willing to settle the case. Pitching these terms correctly can be vital to the success or failure of the agreement. 

What happens if you breach a settlement agreement? 

If either party breaches the terms of a settlement agreement, the other party may make a claim for breach of contract. Usually this would involve making a claim to the County Court or High Court, though Employment Tribunals do have limited jurisdiction for some breach of contract claims. 
 
The usual remedy for breach of contract is damages, based on actual loss caused by the breach. 
 
Some agreements will include a clause to determine what happens in case of a breach. For example, it may say that if an employee breaches the agreement, they will pay back all or some of the payment, depending on the extent of the breach. This must be a genuine estimate of the loss caused by the breach and not a financial penalty to deter a breach. 

Does a settlement agreement need to include notice pay? 

If the agreement deals with termination of employment it is usual for notice to be dealt with. Depending on the circumstances, you may agree to work your notice or your employer may offer payment in lieu of notice (PILON). 

Are there rules for settlement agreements? 

Settlement agreements must follow certain rules in order to be enforceable. Agreements that do not meet these requirements will not be enforceable. 
 
These rules include that the agreement must be in writing and that it must contain specific information. Most importantly, the employee must receive legal advice about the meaning and impact of the agreement. 

Can you take legal action after a settlement agreement? 

Often a settlement agreement is a way of settling a dispute without legal proceedings. You will not be able to make a claim about the issue that was ‘settled’. 
 
Agreements also exclude issues that may not obviously be in dispute. Your right to take action is significantly limited afterward an agreement, however some rights cannot be ruled out. 
 
You may take legal action to enforce the agreement if it is breached. This right cannot be removed. 

Are settlement agreements taxable? 

This will depend upon the amount payable in the settlement agreement and what the payments are for. 
 
For genuine termination payments you may receive up to £30,000 without paying tax. If the payment is over £30,000 it may be taxable. A redundancy payment or enhanced redundancy payment will be exempt, up to the £30,000 limit. 
 
You will pay tax on any payment that represents salary or benefits that you would usually receive, such as commission, bonuses or holiday pay. 
 
Payment in lieu of notice will also be taxable, even though you don’t have to work notice. 
 
 
No hesitation in recommending 
 
Seeking advice and support on concluding a settlement agreement with my employer, Ian immediately responded to my online enquiry and seamlessly guided me through the agreement process to a successful conclusion. 
 
I would have no hesitation in recommending Spencer Shaw Solicitors. 
 
Darrin1967 
 
 
 
 
Confidently Recommend 
 
Spencer Shaw Solicitors have been great in assisting me with advice on a settlement agreement. Though the case was relatively straightforward, Ian and the team were very responsive and gave my case the appropriate attention required. I can confidently recommend them for any employment related legal advice you need. 
 
Riy 
 
 
 
 
Successfully Renegotiated my Settlement Agreement 
 
Ian was always available, explained everything in plain English and successfully re-negotiated my settlement agreement with my employer. I would highly recommend Spencer Shaw Solicitors for anyone seeking employment advice 
 
TerryC-175 
 
 

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Phone: 0121 452 5130 
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