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Settlement Agreements

A Settlement Agreement (formerly known as a Compromise Agreement) is a legally binding agreement between you and your employer. This usually provides for a severance payment by the employer in return for your agreement not to pursue any claims in a Tribunal or a Court. For example, an employee who has been given notice of dismissal for redundancy may dispute the selection criteria used to select them, but is willing to settle their potential claim instead of bringing an employment tribunal claim for unfair dismissal.

Are there any requirements for a settlement agreement to be valid?

In order to be valid and enforceable, it must meet with a number of legal requirements. These are as follows:

  • The employee must receive independent legal advice on the terms and effect of the settlement agreement. This requirement recognises that the employee must be absolutely certain before agreeing to waive their rights.
  • Advice can be given by a qualified lawyer (or certified legal executive), a certified  and authorised officer, official, employee or member of a trade union; or a certified and authorised worker at an advice centre who is not paid for providing advice to the employee.
  • The legal adviser must be clearly identified in the agreement;
  • The agreement must be in writing;
  • The agreement must specify the claims to be waived; and
  • The agreement must state that the above requirements have been satisfied.

Standard clauses in a settlement agreement

Settlement agreements usually contain a number of standard clauses, though the wording of those clauses will differ between individual agreements. Some examples of standard clauses include:

  • A clause setting out the agreed termination date;
  • A clause setting out the agreed arrangements up until your employment termination date, if the termination date is in the future;
  • A clause setting out the payments and benefits to be made up to termination (e.g. normal salary, payment in lieu of accrued untaken holidays etc), and the tax status of those payments and benefits;
  • A clause setting out the settlement payment and the tax status of that payment;
  • A clause setting out when the settlement payment will be made;
  • A clause setting out arrangements in relation to the independent legal adviser (e.g. requiring them to sign a certificate to confirm that they have advised you, and setting out the employer’s contribution to their fees);
  • A “waiver” clause setting out a list of claims you are agreeing to waive in return for the payments and benefits set out in the agreement;
  • A tax indemnity;
  • A confidentiality clause;
  • A clause requiring one or more of the parties not to speak detrimentally about the other party;
  • A clause confirming that various statutory requirements have been complied with;
  • A repayment clause if, despite the agreement, the employee brings a claim or otherwise breaches the agreement; and
  • A warranty that the employee has not guilty of any misconduct which would entitle the employer to dismiss them without payment of notice.

Exclusion of claims

Only certain statutory claims can be settled by a settlement agreement. These can include:

  • Claims for Unfair dismissal;
  • Whistleblowing;
  • Discrimination;
  • Victimisation or harassment related to age, disability, gender reassignment, marriage and civil partnership, pregnancy and maternity, race, religion or belief, sex and sexual orientation;
  • Equal pay.

However, there are several statutory claims that cannot be settled by entering into a settlement agreement, including:

  • Future personal injury claims which you or your employer are aware of, for example for a condition such as asbestosis, which can take many years to develop;
  • Claims for failure to inform and consult in connection with collective redundancies and on a transfer of a business.

Termination payment

The Settlement Agreement will state the full breakdown of payments due to you and also whether any sums will be paid free of tax. A payment of up to £30,000 compensation can be paid without tax being deducted if it is an ex-gratia payment (compensatory rather than contractual payment).

Tax Indemnity

The Settlement Agreement will deal with your notice payment if this is not going to be worked. If you have no contract or your contract does not contain a provision that refers to your employer being able to make a payment in lieu of notice (PILON), then your employer could pay your notice as a gross amount. There is no additional cost to your employer as this money would otherwise have been paid to HM Revenue and Customs.

It is important that your solicitor checks your contract to make sure you receive the maximum sum in the most tax efficient way possible. Also, as it is usual for you to provide your employer with a tax indemnity in the Settlement Agreement, you need to be advised as to what tax you should expect to pay if HMRC challenges the payments made under this agreement.

This tax free allowance should not only benefit companies but may also be used to the employee’s advantage to achieve a larger final payment sum. You should always seek independent accountancy advice in respect of all payments which are to be received, in advance of execution of the agreement.


A clause providing for a written job reference should be included within the settlement agreement with a clause that your employer will not provide an unfavourable reference. The clause should state that they will only provide the agreed reference and will not, at any later stage either orally or in writing move away from the essence of the agreed reference.

Bonus payments/holiday entitlement

If you are owed a bonus or have accrued holidays; details should be included within the agreement. Any payment in relation to accrued holidays will be taxable.

Medical and life insurance

Some schemes will allow you to remain in them for the period up to which your employer has paid. Other schemes will require this benefit to terminate on the last day of employment. However, it is always a good idea to find out if the insurer will offer enhanced terms if you stay in the scheme as an individual once your contract has terminated, if there is no break. This can be explored prior to the termination date.

Legal advice regarding the settlement agreement

An agreement whereby you waive your rights to bring an employment claim can only be recognised in law if a solicitor or certified trade union or adviser signs it off. A specialist employment solicitor will advise you on the merits of your claim and the amount of money you would be likely to receive at an Employment Tribunal. They will also identify any discrimination against you of which you might not be aware.

In practice most employers will contribute towards their employee’s legal fees, however there are no set rules in place. The contribution could range between £250 to £1,000, which could be inclusive or exclusive of VAT. If the fees exceed the employer contribution then they will normally be payable by you (although it is often possible to negotiate an increased contribution with the employer). It is important to note that employers will only contribute to your legal fees if the agreement is actually signed. If you decide not to go ahead, there will be no employer contribution.

In a lot of cases it is preferential and indeed advisable to obtain legal advice before entering into negotiations on the package, in advance of an initial agreement being prepared. In our experience we have found that those who have obtained legal advice early are in a much better position to negotiate a more favourable package. The cost of this advice will not be paid for by your employer but in our view can be extremely worthwhile and make the whole process more informed and as a result, less stressful.

Breach of a settlement agreement

As settlement agreements are legally binding, if your employer fails to or refuses to keep to the terms of the agreement, you can start a claim for breach of contract. The usual remedy for breach of contract is a claim for damages for loss suffered as a result of the other party’s breach. If there is an enforceable repayment clause in the settlement agreement, an employee who later breaches the terms of their settlement agreement may be ordered to repay all or some of the money they were paid by the employer, together with any legal fees incurred by the employer as a result of the breach.

For expert advice in connection with the matter, please contact out employment law department on 02476229582 or email


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