Settlement Agreements FAQs

A settlement agreement needs to include all the agreed terms between the employer and the employee. Key elements include the amount of payment/s to be made to the employee, the treatment of any outstanding benefits such as bonuses or holiday pay, confidentiality clauses, and details of any reference or leaving statement the employer will provide. It should also include a waiver of any claims, meaning the employee agrees not to give up the right to bring employment related legal claims against the employer. Other possible points which are commonly covered off in settlement agreements are non-bad-mouthing provisions, which prevent either party from making negative statements about the other and post-termination restrictions, like non-compete or non-solicitation clauses.

There is no legal obligation on an employer to give a reference although most employers have a policy of giving standard references covering period of employment and job title only. Signing a settlement is a great way to guarantee in advance that you will get a reference and what it will say. Often, the wording of any agreed reference is negotiated as part of the agreement and appear as a schedule to the document. This ensures that both parties have a clear understanding of what will be said in the reference, which can help protect your future job prospects. It is also possible to try and limit what can be said on any verbal reference in the terms of the settlement agreement.

Generally speaking, you shouldn’t be telling anyone about your settlement agreement apart from your lawyer and usually your very close family. A settlement agreement usually includes a confidentiality clause that restricts you from discussing the terms, the fact/existence, terms or background to the agreement with anyone else. Breaching the confidentiality clause would be a breach of contract so it is essential that you get advice to understand these restrictions.

Yes, it is common for bonuses or commission payments to be expressly included in a settlement agreement. Often bonus schemes will state that you only get a bonus if you are employed for the full bonus year and if you are employed at the date such payment is usually made. These restrictions should not put you off seeking a full bonus payment if you have worked the full bonus year or a pro-rated payment if you have only worked part of the bonus year. Usually, an employee will want comfort wording stating that they will be treated in the same way as their remaining peers in terms of bonus calculation and payment. Often an appraisal score will be included at termination.

No, it is entirely up to you if you want to sign the settlement agreement. You should only do so once you are happy with its terms and after you have taken independent legal advice. If you choose not to sign your employment will continue as normal but please be aware that depending on the circumstances you employer may then proceed with redundancy or performance management (as applicable). If you don’t sign a settlement agreement, you would still have the right to pursue any legal claims you may have. However, if you refuse to sign you won’t get the payment in the settlement agreement and that offer may not be repeated by your employer in the future, so it is important for you to get specialist legal advice to enable you to weigh up your options carefully.

Yes, a settlement agreement in the UK is only legal binding/valid if you have taken independent legal advice before signing the settlement agreement. This ensures that you fully understand the terms and effect of what you are signing up to, including importantly the rights/claims that you are waiving. The independent legal adviser will typically explain the terms and effect of the agreement, explain how the tribunal calculates awards which will allow you to assess whether the offer is fair, and if you are unhappy with the offer the lawyer can negotiate for changes on your behalf. Employers usually contribute to the cost of the basic advice on terms and effect of the settlement agreement. For senior executives and/or where you have potential legal claims employers can often be persuaded to cover negotiation related legal fees.

A large part of settlement agreements are in place to keep sensitive information confidential. Most settlement agreements will therefore contain a restriction on you and your employer keeping the existence, terms and background of the settlement agreement confidential. There will usually also be a restriction to prevent you making disparaging remarks about your employer (in the widest sense) once you leave, most clients will want a similar obligation to apply to their former employer.

£30,000 of any payout received as part of your settlement (including any statutory redundancy pay) can usually be paid tax-free. If you receive more than this, it will be subject to usual deductions unless you are making a payment into your pension or the payment represents compensation for injury to your feelings in relation to discrimination.

Since you will have waived your rights as an employee under the terms of the settlement, it is essential that payment of any bonus is included as an express term of that agreement.

Yes, having a disability can give you protection against discrimination under the Equality Act 2010 from day one of your employment. If your employer has failed to consider making adjustments for your disability, if you have faced negative comments about your disability or if you have been treated badly because of your disability by your employer you may have potential claims against your employer. If you have such potential claims these can be raised as part of any approach for or negotiation of a settlement agreement and could well strengthen your negotiating position, potentially leading to a higher settlement figure. The specific circumstances of your disability and how it was treated by your employer and how that has impacted your employment will influence the settlement amount. Employers are often concerned about the potential reputational risks which come with a public employment tribunal claim and that factor can often help with settlement.

If you are a whistleblower – usually where you have raised facts/issues about an actual or potential breach of legal obligation by your employer (wider than just to you) with your employer and you have been badly treated as a result of having done so – this can increase your chances of achieving an exit settlement. Whistleblowers have legal protection from detrimental treatment in retaliation for them whistleblowing. If you have raised concerns about wrongdoing within or by your organisation, this may lead to a more favourable settlement outcome. Employers are often more willing to settle to avoid the potential legal and reputational risks associated with whistleblowing. This is a specialist area of employment law so you will need advice from a specialist.

Your age can affect the amount you get under a settlement agreement especially in relation to redundancy and unfair dismissal. For example, older employees may be entitled to larger enhanced redundancy payments due to their length of service. Age can also impact the calculation of potential future losses which you may wish to try and recover as part of any settlement. If you have been badly treated by your employer due to your age when compared with others, you may have a claim for age discrimination from day 1 of your employment.

The length of your notice period can be a significant factor in a settlement agreement. The agreement may include a payment in lieu of notice (also known as a PILON payment) where your employment terminates without you having to work your notice with you receiving a payment in lieu of what you would have otherwise received during notice.

In general terms the longer your notice the more you can hope to recover under a settlement agreement. Sometimes an employee is required to work all or part of their notice period under a settlement agreement and this can often suit the employee – to be apply for roles whilst still in employment. Garden leave is also common – where notice is served but the employee is not required to work. This can impact your ability to start a new job immediately because your employment will continue to the end of the garden leave period.

Approaching settlement agreement negotiations involves prior preparation and you having a clear understanding of your rights and potential claims before you start. It is easy to misstep and damage your negotiating position.

Get advice from a specialist early on and before you start any negotiation. It may be that a specialist lawyer with tactical experience will give you the best chance of getting your desired outcome on settlement. Tactical steps need to be taken before ant negotiation to give you the best possible starting point in any negotiation.

Settlement agreements mitigate potential risks for both parties by providing a clear and mutually agreed resolution to any dispute between the employee and employer. By signing a settlement agreement you would be waiving your right to pursue legal action in relation to any employment claims you may have, which reduces the risk of costly and time-consuming legal action and related reputation risk for both parties. A confidentiality clause is commonly included in a settlement agreement to prevent either party from disclosing the fact, terms or background to the settlement agreement. For you, the employee, such an agreement provides certainty of outcome and including financial compensation and other benefits, allowing you to move on without the uncertainty of expensive ongoing legal action.

A settlement agreement works by binding both you and the employer legally to the terms set out in the document. Typically, your employer would offer you a financial package and possibly other items, such as an agreed standard reference, in exchange for you waiving your right to bring specific legal claims against the employer. Once both parties sign the agreement and you have received certified independent legal advice, the agreement becomes legally enforceable. You would then receive any payment specified and both parties are expected to keep to any ongoing obligations such as confidentiality and non-disparagement (none bad-mouthing).

Payment agreed under a settlement agreement can vary widely in comparison to what might be awarded at an employment tribunal. What you are able to get under a settlement agreement will depend on the strength of your case and how much any related claims may be worth and the willingness of both parties to settle. Usually, an employee would ask for compensation levels based roughly on what they might hope to achieve at tribunal – often discounted to achieve settlement. A settlement offers the advantage of certainty and speed, as it avoids the cost, stress and unpredictability of going to Tribunal.

Depending on your potential claims and what you settle for it may be that an employment tribunal award will be higher than you settle for, particularly if the Tribunal finds in your favour on significant claims like discrimination or whistleblowing. Settlements are often reached at a level both parties deem acceptable (and which may be less than could be achieved at tribunal) to allow both parties to settle and move on.

The going rate for an independent lawyer advising you on the terms and effect only of a standard settlement agreement is usually £500 plus VAT (£750 plus VAT where a later re-affirmation is required). This contribution by the employer is intended to cover the cost of independent legal advice, which is a legal requirement for the agreement to be legal binding. The actual total cost may depend on the complexity of the agreement and the amount of any negotiation involved. If the legal fees exceed the employer’s contribution, the employee may need to cover the difference. As part of any negotiation the employer is usually asked to cover all legal fees. Where the employee is senior and/or the employee has potential claims the chance of the employer covering all legal fees increases.

The amount of money you receive as part of your settlement agreement depends on how much you are offered and how much you are able to negotiate by way of any increase. Several factors will impact the amount you achieve under a settlement agreement including your length of service, your notice period, your salary, the nature and value of any claims you might have and the reputational risk for your employer if matters are not settled. The main factor on negotiation will often be the expertise of your lawyer in negotiating any increase. Settlements can range from modest sums to significant payouts, depending on the exact circumstances. Settlement payments can cover compensation for loss of future income, unpaid bonuses or commissions, notice period payments and an ex-gratia amount to resolve the dispute/settle any potential claims.

The fact that you are facing disciplinary action does not always make it impossible to achieve exit terms under a settlement agreement. Clearly being under threat of disciplinary action puts you on the back foot and the role of a specialist lawyer is to try and shift this balance.

If employers can be persuaded that disciplinary action is not appropriate and may result in the employee bringing claims a settlement may be possible. It may be possible for the employee to delay or even derail the disciplinary action upon receiving tactical advice from a specialist lawyer. Advice should be taken as soon as any disciplinary action is expected or threatened.

Yes, performance management is hard work for an employer as it takes up substantial management time and usually requires the employee being given a number of chances to improve over an extended period of time. Some employers once they have threatened or started a performance management or PIP process may consider reaching settlement terms. There are often disputes about whether a PIP is appropriate and questioning whether others performing the same or worse are not being performance managed and hence the employee may welcome reaching settlement terms. Where settlement can be agreed the employee avoids the risk of being dismissed eventually on notice under a PIP if they fail to increase as required over the performance management process period.

Generally speaking, employers are fearful of the potential expense and damage to their reputation which could arise from a successful tribunal claim against them for discrimination. This means that if you have such potential claims for discrimination this may, with the help of a specialist lawyer, allow you to achieve a higher settlement agreement payout, especially if you have a strong case. The amount of a settlement which relates to discrimination will depend on the severity of the discrimination, how long it has lasted and its impact on you.

Yes, you can still settle with your employer/former employer even if you have already issued an employment tribunal claim. Part of the settlement will be you withdrawing that claim with the agreement of your employer. Many employment disputes are settled before the issue of tribunal proceedings or where tribunal proceedings have been issued before any final hearing. Settlement negotiations can occur at any stage of the process, often through ACAS or by direct negotiations between the parties. Settling after a claim has been issued allows both parties to avoid the uncertainties and the substantial costs of a final hearing . Settlement after tribunal proceedings have been issued through ACAS will be under a COT3 agreement, which contain similar terms to a settlement agreement.

If you have already left your job or been offered new employment, you may still be able to negotiate and receive a settlement from your former employer, but any element of future loss will be limited if your new role is on the same or greater salary level. Some claims like injury to feeling for example only may not be impacted by you having secured a new role.

The fact that you successfully have moved on does not invalidate any potential claims you might have for unfair dismissal or discrimination. The settlement may address compensation for lost earnings, outstanding pay, or compensation for any unlawful treatment you experienced while you were employed.

If you wish to try and secure exit terms from your employer, please be aware that a common provision in a settlement agreement will involve your promising that you have not received and that you have no reasonable expectation of receiving such an offer of future employment. Hence you should seek advice urgently with a view to securing terms before you get anywhere near receiving any such offer.

If you have been offered a draft settlement agreement by your employer, the first step is to seek specialist independent legal advice. This is crucial, as the agreement will only be legally binding once you have done so and once you and your employer have signed off the agreement.

You need the advice to fully understand the implications of you signing the agreement, including the rights and claims you will be waiving and whether the offer is fair. Your legal advisor can help you assess the offer and negotiate for better terms if necessary, and ensure that all important aspects, such as compensation, references, reputation protection, treatment of shares options/LTIPS are adequately addressed.

Submitting a grievance can be a good tactic to put pressure on an employer to reach settlement agreement terms. This is particularly the case if the grievance relates to serious issues like discrimination or harassment. If your grievance highlights significant problems within the workplace which the employer will struggle to investigate and deal with if upheld, it could well strengthen your negotiating position and potentially lead to a higher settlement offer. Employers may wish to resolve such disputes quickly and avoid the risk of a grievance escalating to a tribunal claim, which could be more costly and damaging to the employer.

Yes, a settlement agreement is legally binding once it has been signed by both parties and once the employee has received certified independent legal advice. The agreement must meet specific legal requirements to be valid, such as being in writing, relating to specific complaints or proceedings, and confirming that the employee has received legal advice on the terms and effect of the agreement. Once binding, a settlement agreement usually prevents the employee from bringing employment related legal claims against the employer in the future.

The size of the employer can be significant in terms of settlement negotiations. Larger companies often have more resources, will understand threatened claims and may be more inclined to offer higher settlement payments to avoid lengthy and potentially damaging disputes. They may also be more concerned about maintaining their reputation and therefore be willing to pay more to resolve issues quickly and quietly. However, the specifics of the case, including the strength of your claims and negotiation expertise and reputation of your lawyer, will also play a crucial role. Smaller employers may not understand what they have done wrong and may not have proper HR functions to advise them sensibly on the risk a tribunal claim would pose to their business. They may not have standard template settlement agreements which can often substantially increase legal fees for the employee with the employer being willing to cover the same.

Settlement agreements offer several advantages for both parties. For the employee, they provide a clear and certain outcome, often including financial compensation and agreed terms around reputation protection. For the employer, settlement agreements help avoid the costs, management time and uncertainty of legal dispute and ensure that sensitive matters are resolved confidentially and brushed under the carpet. Both parties benefit from avoiding the cost, stress and potential negative publicity associated with going to tribunal.

You can seek a settlement agreement at any stage in your employment. Such discussions usually happen where there is a dispute with your employer about how you have been treated, redundancy, dismissal, performance management or where both parties agree that the employment relationship has come to an end. It is also common in cases where there are potential legal claims, such as discrimination, unfair dismissal, or breach of contract for settlement discussions and exit terms to be reached. Employers may propose a settlement agreement to avoid any potential litigation, or you may request one if you wish to leave your job under agreed terms. Either party can approach the other for settlement terms. Employees should always seek legal advice before doing so.

The more experienced the better. David Greenhalgh has over 30 years’ experience of negotiating exits including under settlement agreements. If you have potential claims for discrimination or whistleblowing you want a solicitor who specialises in this area because they will know how best to concern your employer with threats of such legal action. David specialises in discrimination and whistleblowing.

Ideally your lawyer will have been recognised as a Leading Individual by the Legal 500, the main independent guides to the best employment lawyers in the UK. David is recognised as a Leading Individual in the Legal 500 2024 Guide for his expertise.

Positive feedback from clients who have worked with the lawyer before is important. David Greenhalgh has a 5-star rating with his Google reviews.

The legal requirements of a settlement agreement are that it must be in writing, relate to specific complaints or proceedings and be signed by both parties. Additionally, for the agreement to be legally binding, the employee must have received certified independent legal advice, confirming that they understand the terms and effect of what they are signing up to. The agreement should also include a waiver of any claims, a financial settlement and any other terms agreed upon by both parties.

“Without Prejudice” and “Protected Conversations” are legal approaches that allow employer and employee to discuss possible settlement terms without those discussions being legally admissible in the employment tribunal or Court.

“Without Prejudice” protection only applies to settlement discussions where there is an actual legal dispute between the parties.

“Protected Conversations,” under Section 111A of the Employment Rights Act 1996, allow employers to have frank discussions with employees about ending the employment relationship, even where there is no formal dispute at that time. These conversations are protected from being used in unfair dismissal claims only, the protection does not extend to discrimination claims.

By signing a settlement agreement, you would usually agree to waive your right to bring any legal claim against your employer. Commonly waived claims which are waived under a settlement agreement include unfair dismissal, discrimination, breach of contract, and any other statutory or contractual claims that could arise from your employment or its termination. Personal injury claims arising from the employment are usually also waived. The agreement will usually lists the specific claims being waived (and refer to all and any claims), so it is important to review this section carefully with your legal advisor to understand what rights and claims you are giving up. The best approach is to assume that you are giving up all possible claims.

Your annual income can make a difference in the settlement amount as a higher earner is likely to receive larger payments based on loss of earnings, notice pay, holidays, bonuses, or other financial factors. The higher the salary the more senior the employee and at a senior level share option and LTIP are likely to be a significant part in terms of value in any settlement negotiations. The calculation of the value of potential claims, such as unfair dismissal or redundancy, is often based on your salary as a key element which is taken into account. Additionally, if it is agreed that you shall receive a Payment in Lieu of Notice or PILON payment that will be calculated based on your income (and can also reflect any agreed increases to that salary which were due to take effect.

Financial elements included in settlement agreements can consist of ex gratia payments in compensation for loss of employment, payment in lieu of notice or PILON, bonuses, outstanding untaken holiday pay and any other contractual entitlements. The total financial package is often negotiated and agreed upon by both parties before the settlement agreement is signed.

Non-disparagement is a clause often included in settlement agreement which states that neither party shall bad-mouth the other. The employee usually agrees they will not bad mouth the employer where the employer will usually only state that it will use reasonable endeavours to prevent its staff from doing the same. This clause arguably protects the reputations of both the employee and employer, ensuring that neither party should damage the reputation of the other in public or private communications. Such provisions are designed to help both parties move forward without lingering animosity or public disputes.

PILON means a payment instead (in lieu) of notice being a payment made to an employee instead of them having to work through their notice period. This payment compensates the employee for the pay they would have received if they had worked their notice. It is usually calculated based on their salary only and can sometimes include other contractual benefits and employer pension contributions for what would have been the notice period. The use of such PILON payments is common in settlement agreements, especially when an employer wants to end the employment relationship sooner rather than later.

This is a way in which an employer can approach and have a protected (from disclosure in legal proceedings) approach/discussion with its employee about potential exit terms under a settlement agreement.

An NDA (Non-Disclosure Agreement) usually just focuses on confidentiality, preventing the disclosure of specific stated information i.e. trade secrets or sensitive company details.

A settlement agreement often contains provisions that the parties cannot disclose what has gone on or the terms of the settlement. But a settlement is a much broader contract than just an NDA because it also resolves employment-related claims/disputes, typically involving a financial payment from the employer in return for the employee waiving any legal claims they may have.

Where an employee is being made redundant often they will be asked to sign a settlement agreement in return for enhanced redundancy pay.

Where redundancy is disputed by the employee including scoring or selection related claims may be threatened and settled under a settlement agreement.

The use or not of settlement agreements can have a significant impact on employee relations. Where an organisation is commonly known to reach settlement agreements with departing employees this can encourage any departing employee to seek the same. Where an employer does not readily offer settlement agreements this sends a strong message that the employee will not easily be persuaded to settle.

There are often complaints that settlement agreements are used by employers as a way for them to avoid addressing any underlying cultural issues or as a tool to silence and bury complaints. However, when used appropriately, they can provide a fair and mutually beneficial outcome for both parties that allows them to move forward. Many employees value settlement agreements as a tool which allows them to resolve matters, obtain a compensating payment and move on.

Settlement agreements in England are primarily governed by the Employment Rights Act 1996 and related employment legislation. The Act sets out the requirements for settlement agreements, including the need for the employee to have taken independent legal advice and the waiver of specific claims.

Non-financial terms that can be included in a settlement agreement are confidentiality, non-disparagement, reference and leaving statements, treatment of options and equity, waiver and effect of post-termination restrictions such as non-compete or non-solicitation. These terms can be crucial in protecting both the employee’s future reputation and employment prospects and the employer’s business interests and reputation.

In the UK, the term “compromise agreement” was replaced by the term “settlement agreement” many years ago but they are still sometimes used interchangeably, both referring to a legally binding contract between an employer and an employee that resolves disputes and usually ends the employment relationship on agreed terms.

Employers use settlement agreements as a way to allow them to cleanly resolve disputes or end employment relationships without the need for litigation. Such agreements provide a clear, legally binding resolution that avoids the uncertainty, cost, stress and time which are associated with going to employment. Settlement agreements are also used to save management time that would otherwise be spent on consultations, performance management or disciplinaries and grievances.

Such agreements can also protect the employer’s reputation and sensitive information through confidentiality clauses and they help the employer maintain a level of control over the exit process which can otherwise get very messy. By offering a settlement agreement, employers can often reach a mutually acceptable solution that allows both parties to move on.

Generally speaking, yes, because your notice period will generally be longer as will be any enhanced redundancy payment. Also, where you have been employed for a long time it is often harder for an employer to exit you due to performance for example.

Length of service is often a factor in calculating exit compensation, particularly in cases of unfair dismissal, breach of contract and redundancy.

The impact of losing a long-standing job where the employee is older may be reflected in a higher settlement amount. Additionally, long service can often strengthen the employee’s negotiating position, the argument being this is really how you treat/reward your long serving employees.

Whether you have to pay tax on the money you receive under a settlement agreement will depends on the nature of the payments. The first £30,000 of a settlement payment in compensation of loss of employment can usually be paid tax-free. Any ex-gratia amount above £30,000 is subject to usual deductions. Any contractual payment like notice, PILON, holiday pay, commission and contractual bonuses are usually taxable in full. It is important to clarify in the settlement agreement which payments will be subject to tax.

Garden leave is a period during which an employee is still employed, serving contractual notice and being paid by the employer but is not required to attend work or perform their duties. Employers usually reserve the right to put a departing employee on garden leave when they resign or are being terminated. The purpose of garden leave is to prevent the employee from causing any damage to the business whilst at the same time preventing them from joining a competitor. During garden leave, the employee must remain available to work if required, and they continue to receive their usual salary and benefits remaining employed and unable to work elsewhere.

Post-termination restrictions, also known as restrictive covenants, are clauses in an employment contract restricting an employee’s actions after they leave their employment for a limited stated period only.

Restrictions can include non-compete (often the hardest to live with for a departing employee), non-solicitation of clients and potential clients and other staff and non-deal with clients, potential clients and staff. They must be reasonable in scope to be enforceable. Often such restrictions in the employment contract are repeated in a settlement agreement. It is sometimes possible to negotiate the application, scope and period of such restrictions in a settlement agreement.

An ex-gratia payment is a voluntary (non-contractual) payment made by an employer to an employee as a gesture of goodwill under a settlement agreement. Such a payment is not required by law or contract and is typically offered to resolve disputes or compensate the employee for loss of employment. Such payment can be tax-free up to £30,000 if it is compensation for loss of employment and does not relate to notice pay.

A termination payment will usually be a taxable contractual entitlement, such as notice pay or bonus.

Bonuses and commission payments can be included in settlement agreements, but they must be explicitly addressed during negotiations and be expressly stated in the agreement as otherwise they will not be legally payable.

If you are entitled to a bonus or commission under your employment contract, you should ensure that specific amounts are included in the settlement agreement. The agreement should clearly state how these payments are calculated and when they will be paid. If not included, you might forfeit your right to receive them after signing the settlement agreement. Annual bonuses can be paid on a pro-rata basis by agreement.

You should always take advice from your pensions/financial adviser when exiting your employment. They may advise you to ask for an amount over any £30,000 tax free limit to be paid into your pension scheme.

Usually, the settlement agreed will provide for your employer informing the pension when your employment ends and asking the provider to contact you. You may be able to get employer pension contributions in your notice pay depending on the wording of your employment contract.

Your medical and life insurance cover would usually end when your employment ends, unless otherwise stated in the settlement agreement. It is sometimes possible to negotiate for the extension of medical cover for a period to give you cover whilst you are looking for another role. It is important to address these benefits during settlement negotiations if they are important to you and/or your family where you or they are having ongoing treatment under the policy.

The timing of when you receive payments should always be agreed and specified in the settlement agreement. Typically, payment is made within 14 days of termination and sign off and return of company property. Your legal adviser can help ensure that the amounts, timings and tax treatment of payments is clear in the agreement.