Settlement Agreement Frequently Asked Questions

A settlement agreement is a legally binding agreement that is entered into between an employee and their employer which is used to resolve disputes between both parties . A settlement agreement ensures that all negotiated and agreed  terms of settlement including payments to be  made by the employer to the employee are properly documented and in return for such payments the employee waives their right to bring certain claims against their employer .

It is customary for an employer to contribute towards payment of the solicitor’s legal fees, leaving the employee responsible for payment of the balance of any charges. This is not a practice that I follow. I only and always accept the employer’s contribution as full payment of my fees. I never charge the employee. My service is free to employee’s unlike other solicitors who do charge for their advice.

This depends on whether the solicitor will be charging the employee for advice given. If that is the case, the solicitor will usually act on an agreed hourly rate basis, which will be explained to the employee. If the solicitor will only be accepting the contribution offered by the employer, the amount of any such contribution is usually between £500 to £1,000 plus vat.

Both an employer and an employee can propose a settlement agreement, although it is most always proposed by the employer, as the employer will wish to make sure that any payment made to the employee is accepted in full and final satisfaction of the employee’s claims.

The employee must receive advice from an independent solicitor about the terms and effect of the agreement and only the solicitor, employee and employer can sign the settlement agreement.

This depends on the nature and extent of the employee’s claims against their employer. An employee will usually have had without prejudice discussions with their employer about settling their claims before obtaining legal advice. Once the matter is in the hands of the independent solicitor, a negotiated settlement agreement is usually concluded within 1 to 3 days.

If an employee refuses to sign a settlement agreement their legal position will remain exactly as before the settlement was proposed. This will mean that the employee will be required to resolve their claims by bringing an employment tribunal claim against their employer, remain in employment or resign. That is why it is essential to obtain advice from an expert settlement agreement solicitor.

A settlement agreement becomes binding as soon as both the employer, employee and the employee’s independent solicitor have signed the settlement agreement.

There is no difference. The term ‘compromise agreement’ was the term originally used to identify a legally binding agreement reached between an employer and employee. For the past several years, the term ‘compromise agreement’ has been replaced with ‘settlement agreement’.

This depends on which party is in breach. If the employee fails to comply with the terms of the settlement agreement, the employer will have the legal right to demand repayment of the monies paid to the employee under the terms of the settlement agreement. If the employer is in breach, the employee has the legal right to pursue a claim before a court or employment tribunal to enforce the terms of the settlement agreement. The employer would have little or no legal defence against such a claim. 

An employee can approach their employer on a without prejudice basis or following a Section 11A meeting convened by the employer. This is more usually done via communications with the employer’s HR team or immediate line manager depending upon the situation of the employee’s grievance issues, dispute or disciplinary proceedings.

There is no legal requirement for an employee to agree a settlement agreement as proposed by the employer. There will many factors to consider such as the extent of any claims that the employee has against their employer or alternatively, whether the employee is the subject of disciplinary action taken by the employer. That is why the law requires an employee presented with a settlement agreement to obtain legal advice from an independent solicitor who will advise on whether the employee should agree to the terms of the settlement agreement.

No. Redundancy is one of the potentially fair reasons for terminating an employee’s employment. If redundancy is genuine on the facts of the situation an employer is not required to ask the employee to sign a settlement agreement. If there is some concern that the redundancy may be deemed to be not genuine , the employer will usually seek to protect itself by asking the employee to agree a settlement agreement on the promise that the employee will receive an enhanced payment of compensation that is more than the employee would be entitled to by law . 

‘Without prejudice’ is a common law principle that prevents statements made in a genuine attempt to settle an existing dispute from being used as evidence in a court or employment tribunal by either the employee or employer.

Section 111A provides that any offer of a settlement agreement or discussions about it cannot be used as evidence in any subsequent employment tribunal claim of unfair dismissal, even if there is no existing dispute.

The tax treatment of payments under a settlement agreement depends on the nature of the payment. Payments that are considered earnings are subject to income tax and national insurance contributions, while certain termination payments may benefit from a tax-free exemption of £30,000. For example, if the employer agrees to pay the employee £50,000 in settlement of the employee’s claim for unfair dismissal, then the first £30,000 of that payment will be tax free and only the balance of £20,000 will be subject to deduction of tax and national insurance.

Statutory payments such as statutory maternity pay, cannot be contracted out of, but the employer may offer a lump sum payment of the full amount due as an incentive for the employee to agree a settlement agreement.

A PILON is a payment made to an employee instead of requiring them to work their notice period. All PILON payments are fully taxable, and the employer must deduct the relevant tax and national contributions when making a payment to the employee.

The key terms should include the amount of compensation to be paid, the timing of payments, the relevance to the confidentiality of the settlement agreement and agreed references or announcements.

A reaffirmation agreement is used when there is a significant period between the settlement agreement and the termination of the employee’s employment. It requires the employee to reaffirm the terms of the settlement agreement close to or at the time of the termination date to ensure both parties acknowledge the effectiveness of the settlement agreement.

Yes, a settlement agreement can include post termination restrictions such as non-compete clauses, confidentiality obligations, and non – solicitation clauses.

As a rule, a settlement agreement must relate to particular proceedings or identified claims brought by the employee against their employer, but a settlement agreement can and should include a waiver of claims the employee is aware of at the time of signing the settlement agreement.