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Settlement Agreements Q&A

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Q1: What is a Settlement Agreement?

A Settlement Agreement is an agreement (formerly known as a Compromise Agreement) which records an employee’s termination of employment, where an employee receives a termination payment in return for the waiver of all claims against the employer.

Q2: What are the requirements for a valid Settlement Agreement?

For a Settlement Agreement to be valid, certain conditions must be met, some of which include:

  • The Settlement Agreement must be in writing and relate to a particular complaint or particular proceedings; and
  • The employee must have received legal advice from an independent legal adviser on the terms and effect of the Settlement Agreement and its effect on the employee’s ability to pursue any rights in an Employment Tribunal.

Q3: What does “without prejudice and subject to contract” mean?

When negotiating a Settlement Agreement, all communications are treated as “without prejudice and subject to contract”. The purpose of this is to ensure:

  • The parties can speak freely in negotiations without fear of anything said being used in evidence against them should the negotiations break down; and that
  • Neither party is legally bound by anything agreed in the negotiations until a final written Settlement Agreement is signed.

Q4: Can my employer propose to terminate my employment?

It is sometimes the case that an employer wants to propose a termination of employment on mutually agreed terms before there is any legal dispute. This may be for a variety of reasons, but is often because of perceived shortcomings in an individual’s performance, a restructure, or simply a clash of personalities. Rather than going through capability, redundancy or disciplinary proceedings, with the risk of subsequent litigation and in some cases negative publicity, a Settlement Agreement is often seen as commercially beneficial to start confidential exit negotiations.

Q5: Can I be accompanied to a meeting with my employer?

There is no legal right for employees to be accompanied during a meeting to discuss or negotiate the proposed termination of employment and subsequent Settlement Agreement with their employer. However in some circumstances, it may be reasonable to allow an individual to be accompanied, such as those who are disabled, so that the employer is not applying any undue pressure.

Q6: What are the steps in pre-termination negotiations?

Employers need to assess when it is appropriate to open settlement negotiations and have a clear basis for making an approach to an employee.

The first step is to be invited to a meeting at a mutually convenient time and place. At the meeting, the employer explains its concerns and proposes an exit with an agreed settlement package.

If the individual agrees to explore the suggestion of settlement, the employer produces the draft terms in a written Settlement Agreement. The employee must then have a reasonable period in which to consider the formal written terms and to obtain independent legal advice.

If the individual is not interested in exploring settlement, the employer should cease settlement negotiations.

Q7: Can my employer force me to sign a Settlement Agreement as soon as possible?

There is little in the way of practical guidance on how employers should initiate and conduct Settlement Agreement negotiations. However, the Acas Code states that parties should be given a reasonable period of time to consider the proposed Settlement Agreement. As a general rule, 10 calendar days should be allowed to consider a settlement proposal, and a further 10 calendar days to consider the proposed formal written terms of a Settlement Agreement and to receive independent legal advice.

Q8: Does the employer pay for the legal costs?

It is usual for the employer to make a contribution to the employee’s legal costs. However there is no statutory obligation on the employer to pay. The going rate varies depending on the locality and the seniority of the employee, but generally costs are approximately £350-£500 plus VAT.

The employer’s contributions towards legal fees do not normally extend to negotiating amendments to the Settlement Agreement. However, if there are a number of changes a solicitor recommends to the document, there is usually an approach to the Company to seek an increase in its contribution.

Q9: Are Settlement Agreements confidential?

One of the significant advantages of using a Settlement Agreement is that is allows an employment dispute, or a potential dispute, to be concluded relatively quickly and privately. It is in both parties’ interests for the terms of the Settlement Agreement to remain confidential, and an express term to that effect is often included. Typically, the Settlement Agreement will only permit the employee to disclose the terms in limited situations, such as to immediate family members and professional advisers.

Q10: Are termination payments tax free?

A payment made to an employee on termination may comprise several different elements, some of which are taxable and other payments could be tax free in their entirely or in part. By way of summary, below are the most common items:

  • Payments taxable in full include salary payments, contractual bonus or commission payments, garden leave payments, consideration for restrictive covenants and payments in lieu of notice; and
  • Payments which are tax free for the first £30,000 include damages for breach of contract, compensation for discrimination, non-contractual benefits in kind provided on or after termination, statutory redundancy payments and unfair dismissal compensation.

Q11: Where can I obtain further advice about Settlement Agreements?

We offer specialist advice and guidance on drawing up Settlement Agreements to protect you and your business.

Similarly if you have received a Settlement Agreement from your employer, we can advise you on the terms and effect of the documentation.

Please do not hesitate to contact the Employment Team at mfg Solicitors LLP by calling us on 01905 610410 or by completing the online enquiry form on our website: