Settlement Agreements: What Employees and Employers Should Consider Before Signing

A settlement agreement can end an employment dispute quickly.

It can also permanently give up valuable legal rights.

That is why the amount offered should never be the only question.

A properly negotiated settlement agreement should deal with the payment, the claims being settled, notice, holiday pay, bonuses, references, confidentiality, restrictive covenants, tax, legal costs and what happens after the employment relationship ends.

For an employer, the agreement should provide certainty.

For an employee, it should provide a fair and clearly understood exit.

The important question is therefore not simply:

“How much is being offered?”

It is:

“What am I giving up, and what am I receiving in return?”

LawLex Solicitors advises employees and employers on settlement agreements, negotiations and employment disputes in England and Wales.

1. What Is a Settlement Agreement?

A settlement agreement is a legally binding contract between an employer and an employee, worker or, in some circumstances, another person with potential employment claims.

Parties often use settlement agreements to resolve an existing dispute or to bring an employment relationship to an end on agreed terms.

The agreement will usually provide something of value to the employee, often a financial payment, in exchange for the employee agreeing not to pursue specified legal claims.

Settlement agreements were previously known as compromise agreements.

Importantly, both sides enter into them voluntarily.

An employer cannot force an employee to sign one, and an employee does not have to accept the first offer made.

The parties can negotiate.

The Acas guidance on settlement agreements confirms that settlement agreements can include financial payments, references, confidentiality provisions and agreements not to pursue specified tribunal or court claims.

2. Why Do Employers Use Settlement Agreements?

Employers may propose a settlement agreement for many different reasons.

For example, an employer may want to:

• resolve an existing workplace dispute;
• avoid lengthy disciplinary or performance procedures;
• manage a redundancy or restructuring;
• settle a grievance;
• resolve threatened Employment Tribunal proceedings;
• agree an employee’s departure on confidential terms; or
• create certainty about potential legal claims.

A settlement agreement can allow both sides to control the outcome rather than leave the dispute to a tribunal or court.

But employers should not treat it as a shortcut around proper employment procedures.

A poorly handled proposal may create further problems rather than solve them.

3. Why Might an Employee Accept a Settlement Agreement?

An employee may prefer a negotiated exit rather than remain in a difficult employment relationship or pursue lengthy proceedings.

A settlement package may offer:

• compensation;
• notice pay;
• accrued holiday pay;
• an agreed reference;
• an agreed termination date;
• payment of bonuses or commission;
• treatment of shares or other benefits;
• confidentiality arrangements;
• changes to restrictive covenants; and
• a contribution towards legal fees.

The value of an agreement therefore extends beyond the headline compensation figure.

For some employees, an agreed reference or release from a restrictive covenant may prove almost as important as the payment itself.

4. When Is a Settlement Agreement Legally Valid?

Employment law places specific conditions on settlement agreements because the employee gives up statutory rights.

The agreement must, among other things:

• be in writing;
• relate to particular complaints or proceedings;
• identify the relevant independent adviser;
• confirm that the adviser has appropriate insurance; and
• state that the applicable statutory conditions have been satisfied.

The employee must also receive independent advice about the terms and effect of the agreement and its effect on the employee’s ability to pursue the relevant claims.

Simply writing that an agreement settles “all claims” does not automatically make it effective for every statutory claim. The agreement should identify the particular claims that the parties intend to settle. Acas expressly highlights this requirement.

5. Why Does the Employee Need Independent Legal Advice?

Independent advice sits at the heart of the settlement agreement process.

The employee must understand what legal rights the agreement will waive.

The adviser will normally consider:

• the circumstances leading to the proposed termination;
• potential claims;
• the contractual payments already due;
• the compensation offered;
• the wording of the waiver;
• confidentiality provisions;
• restrictive covenants;
• references;
• tax provisions; and
• any continuing obligations after termination.

The adviser should not simply explain where to sign.

The real task is to identify what the employee gives up and whether the document accurately reflects the negotiated deal.

Acas confirms that the independent adviser must not act for or be connected with the employer. A qualified lawyer can provide the required advice.

6. How Much Should an Employer Offer?

There is no standard settlement figure.

The appropriate amount depends on the circumstances.

Relevant factors may include:

• salary;
• length of service;
• contractual notice;
• potential Employment Tribunal claims;
• the strength of those claims;
• likely compensation if a claim succeeds;
• how quickly the employee may find another job;
• unpaid bonus or commission;
• accrued holiday;
• benefits;
• legal costs;
• litigation risk; and
• the commercial value of resolving the dispute quickly.

An employee should distinguish between money the employer already owes under the employment contract and genuine compensation for settling potential claims.

For example, salary, accrued holiday and notice payments may already be due irrespective of the settlement.

The settlement payment should therefore be examined separately rather than treated as one large headline number.

7. Can You Negotiate a Settlement Agreement?

Yes.

Settlement agreements are negotiable.

An employee can reject the offer, accept it or make a counter-offer.

Negotiations may address much more than compensation.

For example, an employee may negotiate:

• a higher settlement payment;
• a different termination date;
• an improved reference;
• payment of outstanding commission;
• treatment of bonus payments;
• continued private medical insurance;
• retention of company equipment;
• changes to post-termination restrictions;
• an agreed internal or external announcement; or
• an increased contribution towards legal fees.

An employer should also consider what it needs from the agreement.

That may include certainty, confidentiality, return of property, protection of confidential information and an effective waiver of identified claims.

A good negotiation therefore focuses on the whole package, not one number.

8. How Long Should You Have to Consider a Settlement Agreement?

Employees should have a reasonable opportunity to consider a settlement agreement and obtain independent advice.

The Acas Code recommends, as a general rule, allowing at least 10 calendar days to consider formal written terms and receive independent advice, unless the parties agree otherwise.

That does not create an automatic 10-day legal deadline in every case.

The circumstances matter.

However, placing unreasonable pressure on an employee to sign immediately can create problems, particularly if the employer’s conduct amounts to improper behaviour.

An employee who receives an agreement with an extremely short deadline should obtain advice quickly rather than assume that the proposed deadline determines their legal position.

9. Are Settlement Agreement Discussions Confidential?

Often, but not automatically in every situation.

People frequently describe settlement discussions as “off the record”, but that phrase has no magic legal effect.

Two different legal principles may become relevant.

The without prejudice rule may protect genuine settlement negotiations where an existing dispute already exists.

Section 111A of the Employment Rights Act 1996 can also protect certain pre-termination negotiations from use in ordinary unfair dismissal proceedings.

However, section 111A does not create blanket confidentiality for every employment claim.

Different considerations can arise in discrimination, automatically unfair dismissal, whistleblowing and other claims.

Protection may also fall away, at least in part, where improper behaviour occurs.

The Acas Code of Practice gives guidance on settlement negotiations and improper behaviour.

10. What Should You Check in the Payment Provisions?

The payment section deserves careful attention.

The agreement should clearly distinguish between different categories of payment.

These may include:

• salary up to termination;
• payment in lieu of notice;
• accrued but untaken holiday;
• bonus or commission;
• benefits;
• redundancy payment, where applicable;
• settlement compensation; and
• legal costs.

The agreement should also state when the employer must make the payment.

Employees should avoid focusing solely on whether the document describes part of a payment as tax-free.

Tax treatment depends on the nature of the payment and applicable tax law.

The agreement will often contain a tax indemnity allocating risk if HMRC later concludes that additional tax or National Insurance falls due.

The wording of that indemnity should therefore receive proper consideration.

11. The Reference Can Matter More Than Expected

Employees often concentrate on money and leave the reference until the final stage.

That can be a mistake.

An agreed reference may directly affect the employee’s next job.

Where the employer agrees to provide a reference, the parties can attach the agreed wording to the settlement agreement.

That provides greater certainty than a vague promise to provide a “standard reference”.

The parties may also agree how the employer will respond to verbal enquiries and how it will describe the employee’s departure.

If the employee’s future career matters to the negotiation, the reference should form part of the settlement discussion from the outset.

12. Confidentiality Clauses Need Careful Reading

Settlement agreements frequently contain confidentiality clauses.

These provisions may regulate:

• the existence of the agreement;
• its terms;
• the circumstances surrounding termination;
• confidential business information; and
• statements about the employer, employee or colleagues.

Employees should understand exactly what they can and cannot say.

Employers should avoid drafting restrictions more broadly than necessary.

A confidentiality clause should also account for disclosures that the law permits or protects.

The fact that an agreement contains a confidentiality clause does not necessarily mean that it can lawfully prevent every type of disclosure.

13. What About Restrictive Covenants?

An existing employment contract may already restrict what an employee can do after leaving.

For example, it may contain clauses dealing with:

• competition;
• solicitation of clients;
• dealing with clients;
• recruitment of colleagues; or
• use of confidential information.

A settlement agreement may preserve, amend or replace those restrictions.

This can become a significant negotiation point.

An employee may accept the financial package but later discover that the agreement continues restrictions that make the next career move difficult.

Employers, on the other hand, may place considerable value on protecting legitimate business interests after departure.

Both sides should therefore identify exactly which restrictions continue after termination.

14. What Claims Does the Employee Give Up?

This is one of the most important parts of the agreement.

The employer usually wants the employee to waive specified claims arising from the employment relationship and its termination.

Those claims might include, depending on the circumstances:

• unfair dismissal;
• breach of contract;
• unlawful deductions from wages;
• discrimination;
• harassment;
• victimisation;
• holiday pay claims;
• redundancy-related claims; and
• other statutory or contractual claims.

The agreement should identify the relevant claims rather than rely only on general wording.

The employee’s adviser should compare the waiver against the actual circumstances of the employment relationship.

That allows the employee to understand what rights will disappear once the agreement takes effect.

15. What Happens If Someone Breaches the Settlement Agreement?

A settlement agreement creates contractual obligations.

If the employer fails to pay the agreed sum, or if either party breaches another enforceable term, the other party may have contractual remedies.

Acas confirms that breach of a settlement agreement can give rise to a breach of contract claim. In England and Wales, a party may in appropriate circumstances bring such a claim in the County Court.

The agreement itself should therefore deal clearly with payment deadlines, confidentiality, property, continuing obligations and the consequences of breach.

16. Should an Employer Pay the Employee’s Legal Fees?

Employers commonly offer a contribution towards the employee’s cost of obtaining independent advice.

The law does not generally require the employer to make that contribution.

However, the employee needs independent advice before the agreement can satisfy the statutory conditions for waiving relevant claims.

A contribution can therefore help both parties complete the process efficiently.

Acas specifically notes that employers should consider contributing to the cost of independent advice, although they do not have to do so.

The employee should check whether the proposed contribution covers the solicitor’s fee and whether additional negotiation would create extra costs.

17. When Should You Speak to a Settlement Agreement Solicitor?

As early as possible.

Employees should ideally obtain advice before accepting a figure or agreeing important terms.

Employers may benefit from legal advice before making the proposal, particularly where potential discrimination, whistleblowing, dismissal or procedural issues exist.

Seek advice promptly where:

• you have received a settlement agreement;
• your employer has invited you to a protected conversation;
• you believe the proposed compensation is too low;
• the circumstances may involve discrimination or whistleblowing;
• a grievance or disciplinary procedure has already started;
• Employment Tribunal proceedings are contemplated or underway;
• restrictive covenants affect your next role; or
• you want to negotiate the terms of your departure.

The earlier you understand the legal position, the more effectively you can negotiate the commercial outcome.

18. How LawLex Solicitors Can Help

LawLex Solicitors advises employees and employers on settlement agreements and employment disputes.

For employees, this may include:

• reviewing the proposed agreement;
• explaining the rights being waived;
• assessing contractual entitlements;
• identifying potential employment claims;
• advising on the settlement package;
• negotiating amendments;
• reviewing confidentiality and restrictive covenants; and
• signing the adviser certificate where appropriate.

For employers, our work may include:

• drafting settlement agreements;
• advising on settlement strategy;
• structuring settlement proposals;
• negotiating terms;
• considering confidentiality and post-termination restrictions; and
• resolving existing employment disputes.

The purpose of good settlement advice is not simply to complete a document.

It is to make sure the agreement actually achieves the outcome the client intends.

19. Before You Sign

A settlement agreement may bring a difficult employment relationship to an end in a controlled and commercially sensible way.

But once the employee signs a valid agreement, the employee will normally lose the right to pursue the claims that the agreement settles.

Before signing, ask three questions:

What am I receiving?

What rights am I giving up?

Does the agreement deal properly with what happens next?

If the answers are not clear, obtain advice before committing yourself.

Frequently Asked Questions About Settlement Agreements

Do I have to accept a settlement agreement?

No. Settlement agreements are voluntary. You can reject an offer or negotiate different terms.

Can I negotiate the amount offered?

Yes. The proposed figure and other terms can form part of the negotiation.

Do I need a solicitor before signing?

You must receive advice from a relevant independent adviser for the agreement to satisfy the statutory conditions required to waive relevant employment claims. A qualified solicitor can provide that advice.

Does my employer have to pay my legal fees?

No general requirement forces the employer to pay them, although employers often offer a contribution towards the cost of independent advice.

Is the first settlement offer usually final?

Not necessarily. Settlement agreements involve negotiation, and either party may make proposals and counter-proposals.

How long should I have to consider the agreement?

Acas recommends at least 10 calendar days as a general rule for considering formal written terms and obtaining independent advice, unless the parties agree otherwise. The appropriate period can depend on the circumstances.

Can a settlement agreement stop me bringing every possible claim?

The agreement must identify the particular claims that it intends to settle. General wording alone that says “all claims” does not satisfy the statutory requirements for waiving all employment tribunal claims.