**This article was updated in August 2021**
Your employer has just mentioned the words ‘settlement agreement’. What does it mean? How will it affect you? What do you need to know? Don’t worry; you’ve come to the right place. We hope to give you all the information you need to know about settlement agreements by answering the questions we are asked most frequently.
Let’s start with the obvious question:
What is a settlement agreement?
A settlement agreement is a contract which stops you bringing claims against you employer.
Essentially, it is a way for you and your employer to resolve employment issues on certain agreed terms. Under the terms, you will give up your right to bring any claims against your employer.
Settlement agreements can also be used to terminate your employment and can settle an ongoing claim you are bringing in a court or employment tribunal.
Both you and your employer are able to suggest a settlement agreement.
What’s in it for me?
It’s important that the deal struck is fair. Each case is different; one person might be looking for money whereas another might need a good reference, or even reinstatement in their job after being sacked. Most settlement agreements result in a ‘clean break’ – that is where you part company with your employer – but sometimes the employment relationship continues afterwards. Here are some examples:
- Your post is redundant and your employer is using a settlement agreement to avoid having to go through a consultation process. You might not get any extra redundancy pay – which you may have been entitled to under your contract (or by way of statutory redundancy payment) – but in return for signing the agreement you might be paid in lieu of working your notice.
- Your employer has evidence that you have committed gross misconduct or is concerned that your performance is inadequate. You are offered a settlement agreement as an alternative to being dealt with in line with the normal procedure, in return for you going quietly. In this scenario, rather than money, your employer might offer to provide you with a basic reference, allowing you to find a new job without the stress of going through a hearing or risking a dismissal on your record.
- You have brought an unfair dismissal claim against your former employer. The evidence is overwhelmingly in your favour and the company wants to avoid the matter going to the employment tribunal. A settlement agreement can be used to settle the claim for an amount agreed between the parties. This might not be for the full value of the claim, however. This is because parties will often recognise the ever-present possibility that you would have lost your tribunal claim.
- You have brought a discrimination claim against your employer. The company is adamant that the claim is false but might be prepared to settle the claim out of court under a settlement agreement to save the cost of defending it. They may offer only a fraction of the potential value of the claim and certainly no more than it would have cost them to defend it.
- You have a terminal illness and your health is failing. You are classed as a disabled person and as such are protected against disability discrimination under the Equality Act 2010. When you are no longer able to work (even when your employer has made adjustments for you), you might agree to resign in return for an ‘ex gratia payment’. Ex gratia means money to which you have no contractual entitlement. To ensure you won’t later decide to bring a claim of disability discrimination, your employer might ask you to sign a settlement agreement.
Do I need independent legal advice before I sign a settlement agreement?
Settlement agreements are not legally effective unless the employee has received independent legal advice on the terms and effect of the agreement.
What would it cost and how can I pay for it?
Employers usually agree to pay towards your legal fees but their contribution won’t necessarily cover all your costs. A contribution of between £250 and £500 plus VAT is common. However, if your situation is complex, or your solicitor needs to negotiate with your employers on your behalf, then your legal fees may be higher than that. It is sometimes worthwhile funding the additional legal fees yourself in order to achieve a better deal.
Your solicitor should discuss their fees with you before they start acting on your behalf. At Truth Legal, we can agree a costs limit with you and ensure fees are not incurred above this level without your express instruction.
I’ve been offered a settlement agreement – do I have to accept it?
No, but depending on the circumstances, your employer might be able to sack you fairly anyway. If you turn down the offer, you might not get a better one. If you feel you’ve been treated badly, you could still bring a claim after turning down a settlement, but you might not be awarded as much money as you were offered initially. You might also incur legal costs in bringing a claim and time and the stress of litigation also need to be considered.
Remember, the terms of a settlement must be agreed by both parties and your solicitor will be able to advise you about what would be reasonable in your circumstances.
If you take advice from a solicitor about a settlement agreement, but you decide not to accept the terms offered, then you may still have to pay all of your solicitor’s fees. Your employer’s commitment to contribute towards your legal fees is only valid if you sign the settlement agreement. Your solicitor will explain the consequences of this to you.
What claims am I settling?
Most settlement agreements are intended to cover every possible type of claim you could bring against your employer. That means you will waive/surrender your rights to bring statutory and contractual claims and certain claims for personal injury.
There are very few exceptions to this: some types of claim cannot be waived even with a settlement agreement. The most common example is personal injury where you are unaware of the injury at the time of signing the agreement. For example, if you were unwittingly exposed to asbestos at work, the settlement agreement wouldn’t prevent you from bringing legal action against your employer if you discovered, years later, you had developed asbestosis due to that exposure.
In general, however, when you sign a settlement agreement, you should assume that it draws a line under everything which has happened between you and your employer, and that you won’t be able to bring any type of claim against them.
Why does the settlement agreement include a long list of irrelevant claims?
Most employers (and their solicitors) use template settlement agreements which are designed to be ‘one size fits all’. If there are some claims that are obviously more likely to apply in your circumstances, these are sometimes referred to separately in the agreement. They are sometimes called the ‘particular claims’. Unfair dismissal is the most common one, but if you were resigning in connection with a health problem, then disability discrimination would be a particular claim too.
Apart from the particular claims, employers will also try to ensure that there are no other possible claims you could bring against them in future. Template or precedent settlement agreements often contain a list of all known types of employment claim – even ones that couldn’t possibly apply to you. For example, most agreements retain wording relating to pregnancy and maternity regardless of your gender. They might refer to rights of part-time workers and the right to be consulted in relation to redundancy even if you have never been in those situations.
It doesn’t matter if most of the listed claims don’t apply to you. The important point to understand is that you won’t be allowed to bring any claims against your employer once the agreement has been signed.
Is my employer trying to ‘gag’ me?
Confidentiality clauses (sometimes referred to NDAs – non-disclosure agreements) are common in settlement agreements. They usually mean that the parties promise not to disclose the terms or even the existence of the agreement to anyone (usually with a few exceptions in relation to immediate family or as required by law). This is to protect the employer’s reputation and prevent other employees negotiating a similar settlement.
The agreement may also prevent you from making damaging statements about each other. This would prevent you making harmful comments in the press or on social media about your employer – even if you’re telling the truth. However, it cannot prevent whistleblowing.
Why is there all of this legal jargon?
For a settlement agreement to have legal effect, it needs to refer to specific sections of employment legislation. It must also include clauses that say you are waiving/surrendering some (or all) of your employment rights. Many of the terms used have specific meanings which are required to give the settlement agreement its intended effect.
The settlement agreement states my ‘reason for leaving’ – does it need to be accurate?
Specifying a ‘reason for leaving’ in a settlement agreement doesn’t usually matter. However, when both parties are bound by confidentiality, it can be helpful to agree what you will say to your friends/colleagues and prospective future employers about why you left. Common reasons are ‘redundancy’ and ‘mutual agreement’ but some agreements don’t mention the reason for leaving at all. It is important to establish what your employer will tell prospective future employers about your work and why you left – for example, by agreeing the wording that will be used in any reference they provide.
What’s an ‘agreed reference’?
A settlement agreement can include a promise by your employer to provide a reference about you to prospective employers. The wording and form of the reference can also be agreed with the settlement agreement – sometimes as an appendix to the agreement itself.
It is increasingly common for employers to simply provide a basic reference confirming the dates of your employment and job title but occasionally a fuller reference can be negotiated.
The agreement should also make it clear that if your former employer is asked to comment about you verbally, or to fill in a tick-box form about you, the information they provide will be no less favourable towards you than the agreed wording.
Who are ACAS and what is their role in settlement agreements?
ACAS stands for the Advisory Conciliation and Arbitration Service. It is not necessary for ACAS to play any role in your settlement agreement but they provide a free conciliation and advice service by telephone to employers and employees.
What’s the difference between an ACAS agreement (COT3) and a settlement agreement?
ACAS can settle employment tribunal claims (and potential claims) using a special type of agreement called a COT3. The parties to a COT3 don’t need to be represented by solicitors. Apart from a settlement agreement, a COT3 is the only other legally effective way that an employee can waive/surrender their employment rights.
ACAS agreements are usually much simpler and less comprehensive than settlement agreements. There are limitations to the types of claim that may be settled using an ACAS agreement. This is why employers often prefer to use settlement agreements.
For more information about ACAS, visit their website.
How do I negotiate a better deal?
Your solicitor should work with you to formulate a strategy for the negotiation. At Truth Legal, we have a number of tried and tested tips that can help in any negotiation:
- Think about your opponent’s motivations and anxieties. Your employer might be worried about the expense of defending litigation, or about bad publicity. They might be anxious not to gain a reputation for paying people off. If so, your solicitor could suggest changes to the agreement to give your employer extra reassurance that the deal will be kept confidential.
- Keep your cool and try not to let things get personal. Let your solicitor know if you find your employer’s behaviour underhand or oppressive.
- Be realistic but don’t be afraid to ask for what you want, especially if it’s not just about the money. For example, employers will sometimes provide a written apology as part of a settlement agreement.
- Aim high but be prepared to compromise. To strike a deal, both sides will need to feel that the agreement is a fair one.
Another important tip is to ensure you have the right solicitors acting for you. If you do not have faith in your solicitor’s ability, always remember that you are entitled to switch solicitors if you wish. At Truth Legal, we have extensive experience of successfully negotiating settlement agreements.
Will I have to pay tax on my settlement payment?
Basically, any money received that is part of your normal wages or salary should have tax and national insurance contributions deducted. So, any pay up to the leave date will be taxable as will any holiday pay.
In addition, you will have to pay tax and national insurance in respect of your notice period (whether or not this is worked). This is called Post-Employment Notice Pay and there are rules around how this is calculated. This can be complex.
It is no longer possible to argue that no tax should be payable in relation to a notice period. Therefore, if no reference is made to the notice period, and notice has not been worked, tax will become payable on part of the termination payment. This will reduce the amount you will receive or you may be asked later to pay the tax (or refund the employer any tax they have had to pay on your behalf).
The issue of notice aside, termination payments under £30,000 are not taxable.
Even where the parties are agreed that your settlement payment isn’t taxable, it’s common for employers to ask for a ‘tax indemnity’ as part of the settlement agreement. That means if HMRC decide that any tax is due, you will be liable for it. The indemnity will usually state that you must reimburse your employer for any tax that HMRC claim from your employer.
My settlement agreement says ‘without prejudice’ – what does that mean?
It means the draft agreement, and negotiations around it, is ‘off the record’ and cannot be shown to a court as evidence of admissions against either party. The legal concept of ‘without prejudice’ is based on the principle that it’s helpful for parties to speak freely when trying to come to an agreement. If they know that anything they say in these discussions cannot be used as evidence against them, it allows the parties to be more open.
The settlement agreement should say that once it has been signed by all the parties, it becomes ‘open’, i.e. the opposite of ‘without prejudice’.
As an aside, using the words ‘without prejudice’ in a document does not automatically give it the legal protection mentioned above. The document must also be a communication made as part of a genuine attempt to settle an existing dispute.
There are parts of the settlement agreement which I don’t understand or I cannot comply with – does this matter?
It is essential that you understand everything in the agreement and if there is anything you won’t be able to comply with (or any term which you have already breached) you need to discuss it with your solicitor.
For example, you might have told colleagues about your negotiations before you saw the confidentiality clause and realised you were supposed to keep the existence of the agreement confidential. If you sign up to a clause that you have already breached (or if you breach the term after signing it) and your employer finds out about it, they might argue they no longer have to fulfil their side of the bargain. They might refuse to pay the settlement payment or even try to reclaim money they have already paid to you.
This information is no substitute for specialist legal advice on your situation. If you would like further advice or you have received/intend to make a settlement agreement, contact Truth Legal to arrange a no-obligation discussion with a solicitor.