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Settlement Agreements 

What is a Settlement Agreement? 
A Settlement Agreement (is the new name for Compromise Agreements). It is a legally binding contract made between an employee and employer, either during or after employment, which formally agrees the leaving terms between the parties and prohibits the employee from bringing legal action against the employer in respect of his/her employment and/or its termination, usually in exchange for a termination payment. 
What are the benefits of a Settlement Agreement? 
Settlement Agreements offer the benefit of certainty and a clean break between an employee and his/her employer. An employee will have the security of a termination document setting out what financial settlement he/she is receiving together with other aspects of termination such as a job reference. The employer, in turn, has the guarantee that it will not have to deal with a future claim from that employee. It is for these reasons that many employers and employees use Settlement Agreements, even where an employer has followed a fair process and/or the employment has ended amicably. 
When might a settlement agreement be offered? 
Settlement Agreements may be offered in many situations, whether during or after employment. They may, for example, be used to avoid a drawn-out redundancy, disciplinary or performance process, which can often be costly and time-consuming for an employer and lead to ongoing problems with the employee. 
An employer may also consider offering a Settlement Agreement where there is an existing dispute with an employee as a means of bringing that dispute to an end. 
They are also often used routinely by larger employers such as banks at termination date, as a “fail safe” approach, even where there is no question of a dispute. This does not necessarily mean that your employer considers that they are at risk of a claim, it is that they do not want an employee raising issues after they have left (especially if they have made a termination payment e.g. following a redundancy). 
NB: An employee is under no obligation to accept a Settlement Agreement and should only do so once independent legal advice has been obtained; an Agreement cannot be binding unless the employee has received this advice from a Solicitor and they have signed the adviser's certificate. 
A 10 day cooling off period 
You may be presented with a settlement agreement by your employer completely out of the blue. This is more likely to happen where your performance is brought into question, and your employer wants to give you the option to leave under agreed terms rather than go through a performance process. 
You do not have to accept the offer. You can reject it, or request a proper performance process is followed. 
ACAS have issued a statutory Code of Practice on Settlement Agreements, which sets out how Settlement Agreements should operate and also provides best practice of how pre-termination negotiations should be undertaken. The Code is not binding, but employers would need to justify why they deemed it not necessary to adhere to it. 
The ACAS Code recommends that you be given a period of 10 calendar days to consider an offer made by an employer, but it can be less if this is considered to be reasonable. 
The Code also gives examples of “improper behaviour” associated with reaching a settlement including putting undue pressure on you to agree an offer. This includes, for example, an employer saying before any disciplinary proceedings have begun that you WILL be dismissed if you do not accept the offer, and also all forms of bullying and harassment and intimidation. 
You will need to be careful and guarded if there is an unexpected approach by your employer with an offer for you to leave. It can be difficult to negotiate a figure upwards once you have already agreed to it (even though terms are not binding until you have taken legal advice on the Settlement Agreement). It is not wise to even provide the most basic signal that you are prepared to give up your employment. 
Unless you consider the offer is too good to turn down, you should preferably just listen to what your employer has to say at the first meeting without committing yourself either way, and then take immediate legal advice. 

What are the usual terms of a Settlement Agreement? 

Below is an example of clauses which are typically found in the majority of Settlement Agreements:- 

Termination Date: 

This will set out when your employment has ended, or will end. This may be many months away, or very frequently, the proposed date is only a few days away from when you have been presented with the agreement (or the date may have already passed). 

Reason for termination: 

This should usually be specified, and in some cases the reason will simply be stated as a “mutual agreement”. 


For the majority of employees, this is likely to be the most important aspect of the Agreement. The first £30,000 of any compensation under the Agreement can usually be paid free of deductions for tax or national insurance contributions. It is also important that there is a timeline for payment of this sum (for example, in the next payroll, or 21 days after the signing of the Agreement). Depending on the circumstances surrounding the proposed termination of employment, it is often possible to negotiate the compensation figure upwards, and this is something we will be able to discuss with you. 

Tax indemnity: 

In light of the fact that some elements of the compensation can be paid tax free, a tax indemnity is always given by the employee. This makes you ultimately responsible for the payment of any tax and national insurance should HMRC determine that tax should have been deducted. Such an indemnity is entirely usual as it is ultimately your tax to pay in the unlikely event that HMRC should decide this. 


Very often, a Settlement Agreement will provide for a payment in lieu of notice (otherwise known as “PILON’). Such a payment is made where you are not working your full notice or being put on garden leave. In other words your employment is being terminated much quicker than would otherwise be the case if you were working out your notice. PILON payments are usually subject to tax and National Insurance Contributions (NIC). 

Payments up to the Termination Date: 

The Agreement needs to provide that you will be paid your salary, accrued holiday, benefits, bonus and outstanding expenses up to the termination date. Please note that most benefits stop at the termination date (including life cover and health insurance), unless otherwise agreed. 

Bonus or Commission, Deferred Stock Options and Share Awards: 

You will need to check the terms of your Employment Contract to determine whether you are entitled to outstanding commission, bonuses, shares, stock options or deferred payments under various share schemes. If so, the amounts will need to be inserted into the Agreement. 


Where applicable, payments into your pension fund should continue up to the termination date and, where a payment in lieu of notice is being made, your employer may be obliged to continue to make contributions for an equivalent period depending on the terms of your contract. Where you elect to pay part of the settlement sum into your pension, this needs to be provided for in the settlement agreement otherwise you may not be able to take advantage of the tax free nature of the payment into your pension. 

Return of Employer’s Property: 

You will usually be required to return company property within a certain timeframe, usually on or before the termination date, but in some cases, it can be within a period of time after this. If you have been allowed to retain some property such as a laptop and phone, this needs to be set out in the Agreement. 

Waiver of Claims: 

Your employer will want to make sure that the Agreement prevents you from bringing future claims against your employer. The Agreement usually specifies which claims are being waived (i.e. unfair dismissal and/or breach of contract). In any event, there will often be a huge list of statutes that you are agreeing to waive any right to claim under. This is entirely usual. Your employer cannot, however, compel you to waive your right to claim for any personal injury which you were not aware of at the date of signing of the Agreement. You can also not waive your right to accrued pension rights, or to enforce the actual terms of the Agreement itself. 


You usually have to warrant that you are not aware of any circumstances which would have entitled your employer to dismiss you without notice (summary dismissal) prior to the signing of the Agreement. This covers the situation, for example, where you know you have been negligent or committed some act of gross misconduct, but have been covering this up. 

New job offers: 

Ordinarily, you are not under an obligation to disclose future job offers (and would not be advised to do so). However, in some cases, the Agreement will require you to warrant that no job offer has already been made or where you have an expectation of it being made. The reason for this is that is because your future loss of earnings is the main part of your damages were you to issue Tribunal proceedings and win, it could impact on your employers decision to pay you a certain level of compensation if they knew you were simply going to walk into another job. 


An employer is under no obligation to provide you with a job reference, so it is always advisable to make sure that one is attached to the Agreement which becomes binding on your employer. Most employers will only provide a factual reference which sets out dates of employment and the employee’s job title. It may be possible, however, to negotiate a more personal reference which again, should be attached to the Agreement. A reference clause should also state that any oral references to future employers will be given in a no less favourable manner. 


This clause prevents you from discussing the terms of the Settlement Agreement and, in some cases, the circumstances surrounding it. It is entirely usual. You should ensure that you are able to discuss the Agreement with your immediate family and you need to be able to inform prospective employers of the reason why you left, even if this is simply in general terms. 

Non-Derogatory Clauses: 

There will usually be a clause which prevents you from making derogatory remarks/statements about your employer to a third party. It is important to ensure that this obligation is mutual so that your employer (or named individuals) cannot make disparaging comments about you either. 

Restrictive Covenants: 

Where you have restrictive covenants in your contract of employment, these are likely to be re-affirmed in the Settlement Agreement. It is important to check that the restrictions set out in the Agreement are no more onerous than those which appear in your original Contract of Employment. It may also be possible to negotiate a reduction or, in some cases, a complete removal of some or all of the restrictions. Where the restrictive covenants are new, these also need to be checked to see if they are too onerous and whether, in fact, you should be agreeing to them at all. 

Breach of the Agreement: 

The Agreement is likely to provide that if you breach any of its terms, you have to then repay some or all of the payments being made by your employer and that you indemnify them for future costs and proceedings in seeking to recover the same (and in some cases losses arising from the breach). This is a usual clause, although it often needs to be watered down so that only a “material” breach should give rise to any repayment, and even then, the repayment should not include those sums which you were entitled to receive in any event (such as Contractual Notice Payments). 

Legal Fees: 

Most employers will agree to pay a contribution for you to receive legal advice in relation to a review of the Settlement Agreement. This will usually be between £250 and £500 plus VAT, but it can be more. 

Entire Agreement: 

Normally, the Agreement will specify that, by signing the Agreement, you are not relying on the incorporation any other document that existed prior to the signing of the Agreement. In other words, the Settlement Agreement contains the full terms between the parties. 
Andrew Parascandolo 
Employment Solicitor 


Phone: 01423 564551 
Email: ap@powell-eddison.co.uk 
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