Settlement agreements

We are frequently contacted by employees who have been offered a settlement agreement by their employer. Sometimes people are aware that this was on the cards, for example if the company have announced a programme of redundancies, but for others it can come like a bolt out of the blue.

Formerly known as compromise agreements, settlement agreements are a legally binding agreement used to settle disputes between an employee and employer. It may or may not include terminating employment, but it usually does.

The employee must have independent legal advice

Because an employee is signing away their rights to bring claims against their employer, the law requires them to have independent legal advice so that they understand the implications of signing a settlement agreement.

As well as going through the settlement agreement with a client to make sure they understand what it means, our advice also includes considering what claims you might have so you understand what it is that you’ll be signing away and also whether what you’re being offered is reasonable in the circumstances.  This involves exploring what has happened and why.

Settlement agreements can be used in all sorts of situations – amicable or not

It is not just where there is an acrimonious claim that a settlement agreement can be used. It can be used as a way of avoiding a situation where a claim might arise, for example where an employee is threatened with a process which could result in their dismissal and they say that dismissal would be unfair. It might be the employer/employee relationship has completely broken down and neither side can see a way forward. Or it might be an employer is offering an enhanced redundancy payment or simply wants to reward a long serving employee who is retiring and know for sure that the matter is concluded and won’t come up again in the future.

It doesn’t have to be the employer who proposes a settlement agreement, it’s possible for an employee to suggest using one.

The package doesn’t just cover financials

For the majority of employees a key concern is ensuring they receive appropriate compensation for settling their claims and for terminating their employment if this is part of the agreement. However, packages agreed as part of a settlement agreement are not confined just to monetary compensation.

An agreed reference is often also important, particularly where trust has broken down between employer and employee. In some cases messaging can be important, whether internally and/or externally, and so an agreed announcement could be included.

In the case of directors and shareholders, they may also be agreeing to resign their office and sell their shares.

It’s important to note however that it is not legally permitted for an employee to sign away their rights to go to the police or a regulator if they think there is something that should be reported.  No matter what the agreement tries to say, an employee can take the money, sign the agreement and still go to the police if they so wish.

Employer will contribute towards, or even pay all, the legal costs

Although there is no legal requirement for an employer to pay the employee’s legal fees, because of the legal requirement for the employee to get independent advice it would be expected that the employer will make at least a contribution. In many cases the employer pays all the costs.

Payments which are compensation for loss of employment can be tax free up to £30,000

Any contractual payments, such as salary, holiday and notice pay, must have tax and National Insurance deducted. The first £30,000 of payments that are to compensate for loss of employment are tax free. Because it’s common for settlement agreements to include a tax indemnity, meaning the employee will be required to reimburse the employer for any tax which HMRC decides should have been paid, it’s important to make sure the agreement is clear about what is being paid and what elements are taxable or not.


If you have been given a settlement agreement, or are in discussions which might lead to a settlement agreement and need advice or guidance, please get in touch on 01242250039 or

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