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Settlement Agreements

A Settlement Agreement (formerly known as a Compromise Agreement) is a legally binding contract between employer and employee which settles claims that the employee may have against their employer.

The terms of the Settlement Agreement will be mutually agreed between the employer and employee. Those terms will then be set out in the written settlement agreement document, which will identify the claims which the employee agrees not to pursue in exchange for the agreed payment. Any Settlement Agreement should be customised for the specific employee and their individual circumstances.

Therefore, it is advisable to seek expert legal advice first.

Our guide to Settlement Agreements includes the following information:

  • Requirements for a Settlement Agreement to be valid;
  • Standard clauses in a Settlement Agreement;
  • Exclusion of claims;
  • Termination payment;
  • Tax Indemnity;
  • References;
  • Bonus payments/holiday entitlement;
  • Medical and life insurance;
  • Legal advice regarding the Settlement Agreement;
  • Breach of a Settlement Agreement.

Settlement Agreements are a very useful way of ensuring that employer/employee disputes (or possible disputes) are concluded without the need for either side to resort to legal action. However, the law relating to them can be complex and it’s always a good idea to take expert legal advice before you begin to go along the Settlement Agreement route.

For expert advice in connection with the matter, please contact our employment law department on 02476 229 582 or email

Types of Clauses found in a Typical Settlement Agreement:

As the government’s Coronavirus Job Retention Scheme begins to wind down, many jobs have been placed at risk. The recently announced recession, combined with the development of new work and leisure habits, will no doubt result in an increased number of redundancies.

One method of concluding a redundancy is via a settlement agreement. This is a legally binding document which will, as a general rule, result in an employer making a severance payment in exchange for the employee’s agreement not to pursue any court or tribunal claims. As an employee it is important to ensure that your rights have been respected and that you have received everything that you are an entitled to. Equally, employers must ensure that all potential claims have been dealt with, providing certainty and closure.


In order to take effect, a settlement agreement must comply with certain formalities. These are:

  • The agreement must be in writing.
  • The agreement must relate to a particular claim or proceedings.
  • The employee must have received advice from a relevant independent adviser on the terms of the agreement and, in particular, its effect on their ability to pursue his rights before an employment tribunal.
  • The adviser must have appropriate insurance to cover a claim in the event there is a claim by the employee for a loss arising from the advice.
  • The agreement must identify the adviser.
  • The agreement must state that the conditions regulating the validity of the agreement have been met.

The independent adviser can be a qualified lawyer; an official, officer, employee or member of an independent trade union who was been certified and authorised by the union; or a certified and authorised advice centre worker. The adviser cannot be employed by, acting for or connected to the employer.

Standard Clauses

While the agreement must specify which claims it deals with, a number of clauses in the agreement will be common across most such documents even if the specific wording is different. The most straightforward of these will set out agreed dates, such as the date employment will end, any payments to be made up to that point, the amount of the settlement payment and the date the settlement will be paid. It is also very likely that a settlement agreement will include a confidentiality clause, a tax indemnity, a repayment clause in the event that the employee breaches the agreement, and a warranty that the employee has not committed any misconduct that would allow the employer to dismiss them without pay.

Exclusion of claims

There are limits on the claims that can be settled via a settlement agreement. Claims that can be settled this way include unfair dismissal, whistleblowing, discrimination, victimisation or harassment related to a protected characteristic, and equal pay. However claims for personal injuries that are yet to arise are not covered. This is because some conditions, such as asbestosis, can take some time to develop. Claims for failure to inform and consult in connection with collective redundancies and on a transfer of a business are also not covered.

Termination payment and tax

A full breakdown of payments and whether any sums will be free of tax will form part of the agreement. Up to £30,000 can be paid tax free, provided it is a compensatory payment rather than a contractual one.

Where there is a payment in lieu of notice (PILON) this may be paid without deducting tax. Generally this will be the case if the employee does not have a contract or if the contract does not allow the employer to make a PILON.  There is no additional cost incurred by the employer as the money would otherwise have gone to HMRC as income tax and national insurance contributions.

The settlement agreement should also include details of any bonuses and any accrued holidays. Any payments in relation to accrued holidays will be subject to tax.

When taking advice, the employee should look to ensure they receive the settlement payment in the most tax efficient manner. In addition, as a tax indemnity is usually given in the settlement agreement, it is essential to know exactly how much tax would be payable were HMRC to challenge the payments. Any employees considering a settlement agreement should take independent accountancy advice in respect of payments ahead of signing.


Settlement agreements should include a clauses providing for a written job reference and that the employer will not provide an unfavourable reference. The parties should agree the form of a reference and the employer should agree to provide only this reference and not move away from the essence of it at a later stage.

Medical and life insurance

If an employee has medical or life insurance via their employer, the date of termination can vary. Some schemes will allow the employee to remain until the end of the period that the employer has paid for. Others will terminate the scheme on the last day of employment. Despite this, it may be possible to stay in the scheme on enhanced terms after the end of the employment, provided there is no break. This should be explored with the insurer before the contract comes to an end.

Legal advice for an employee

As previously mentioned, an agreement where an employee waives their rights can only be valid when they have received advice from a qualified lawyer, certified trade union advisor or certified advice centre lawyer. A specialist employment solicitor can advise on the merits of a claim as well as its potential value, and any further potential claims.

Generally employers will contribute towards the employee’s legal fees for advice on a settlement agreement, ranging from £250 to £1000. It may be the case that an employee incurs costs over the employer’s contribution. In this situation the employee will be liable for the fees unless they can negotiate an increased contribution. The employer contribution will only be paid in the event that the agreement is signed.

In many cases it is prudent to obtain legal advice before the start of negotiations. Early legal advice places an employee in a more advantageous position, leading to a larger settlement. The cost of this advice will not be met by the employer but will often result in less stressful negotiations and a more favourable outcome.

Legal advice for an employer

It can also be worthwhile for an employer, particularly smaller businesses, to obtain legal advice when dealing with settlement agreements. Although online templates for settlement agreements are available, these are generic. Agreements drafted by a specialist solicitor will comply with the formalities and be specific to each case. In addition employers will have peace of mind that they are not over-settling a claim compared to what the employee could obtain in a tribunal claim.

Breach of a settlement agreement

Settlement agreements form a legally binding contract, which can be enforced via the courts if necessary. The usual remedy will be damages for loss suffered as a result of the other party’s breach. If the agreement contains an enforceable repayment clause, employees who go on to breach the terms of the settlement agreement may have to pay back some or all of the money they were paid by their former employer. They may also be responsible for any legal costs incurred.

A recent High Court decision, Duchy Farm Kennels Limited v Steels, dealt with a breach of a confidentiality clause in a settlement agreement. In this case confidentiality was breached by the former employee. The settlement payment was being made in instalments and the employer stopped paying after it became aware of the breach. The Court found that the clause in this case was not a condition of the agreement, breach of which would have allowed the employer to stop making the payments. Instead the confidentiality clause was held to be an intermediate term, where breaches can be repudiatory (bringing the contract to an end) or cause only a liability for damages, depending on the seriousness. Although Mr Steels had told others about the agreement, the Court held that the breach was not sufficient to repudiate the agreement. The breach would not have had any commercial effect on the employer and people familiar with both parties were likely to be aware that there had been a claim and work out that there had been a settlement agreement. The employer expressed some concern about copy-cat claims but this was seen as unlikely and, in any event, damages would have sufficed to compensate the employer if there was a loss. Any employers wishing to repudiate a settlement agreement if confidentiality is breached would be sensible to include wording specifying that confidentiality is a condition of the contract.

Field Overell LLP act for both employees and businesses in connection with a wide range of employment matters. For more information, please contact Andrew McCusker on 024 7622 9582 or

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