Settlement Agreements 101

Settlement agreements are useful tools in resolving workplace disputes and bringing employment relationships to an end in a mutually agreed way. However, the process of approaching and negotiating settlement agreements can be tricky. Receiving expert advice on the terms of a settlement agreement is also a legal requirement for it to be binding.

Thompsons Solicitors has a team of experts who specialise in settlement agreements and work with thousands of people going through the process with their employers every year. Below, specialists from our Settlement Agreement Unit answer some of the most frequently-asked questions by clients about the process.

What is a settlement agreement and why do I need to sign one?

Settlement agreements, formerly known as compromise agreements, are legally binding contracts used to end an employment relationship on agreed terms. In return for signing a settlement agreement and waiving most of your legal rights, such as being able to make a claim for unfair dismissal, you will usually be given a compensatory lump sum payment.

Can I still pursue a legal claim against my employer if I sign a settlement agreement?

As an employee, you have the right to bring a claim against your employer if they act illegally or in breach of employment law. However, by agreeing to and signing a settlement agreement, you will no longer be able to sue your employer in a tribunal or court for any ongoing, potential or future claims, individually or as part of a group unless the agreement specifies otherwise.

There are limited rights that should still be protected within the agreement and when going through the process, a specialist like those at Thompsons will ensure these are included before anything is signed.

Are the payments included in a settlement agreement tax-free?

This depends on what payments you are receiving and how these are defined within the agreement.

Generally, the first £30,000 of a payment made as compensation for loss of employment or redundancy (both statutory and contractual) will be tax-free. However, how the payment is defined within the agreement is crucial and can make a difference as to whether the payment benefits from tax exemption. Thompsons’ settlement agreement specialists will review this with you and make the necessary amendments to your agreement.

You will have to pay tax and national insurance on payments which are considered as earnings, such as wages and holiday pay. Payments in lieu of notice (PILON) are also taxable, whether they are contractual or not.

As of 6 April 2018, a settlement agreement needs to make it clear that either notice has been served or it needs to specify the amount of Post Employment Notice Pay (PENP) that is payable. If the agreement makes no reference to notice pay, HMRC will treat part of the compensation payment as notice pay, and subject it to tax and national insurance. Our specialists will ensure that the appropriate terms are used within the settlement agreement to protect the tax status of the payments.

When will I receive my settlement agreement payment?

Your settlement agreement should specify a time limit for payment. Thompsons’ experts will ensure that the timescale included in your agreement is fair and reasonable.

Will my employer give me a reference after I’ve signed a settlement agreement?

There is no legal obligation for an employer to provide an employment reference. For an employer to be legally obliged to give a reference, there must a relevant clause included in the agreement that confirms they will do this. It should also stipulate how they will provide it and within what timescale.

Can I tell anyone about the agreement?

Settlement agreements usually include a confidentiality clause which prevents the agreement and terms being disclosed to third parties. However, our specialists can ensure that the clause is not overly restrictive and that it is balanced in your favour to ensure you can discuss matters with relevant parties, such as prospective employers and your professional advisors.

Do I have to get legal advice before I sign a settlement agreement?

Yes, it is a legal requirement. In order for a settlement agreement to be binding and lawful, it must be signed by a qualified lawyer. Our settlement agreement specialists will also review the terms of the agreement to determine whether or not they are reasonable.

What happens if the terms of a settlement agreement are breached?

If either party breaches the terms after the agreement has been signed - for instance if the employer fails to make a payment - the breach and any losses incurred would need to be proven. This would then allow the wronged party to claim for breach of contract and related costs.

Who pays for the cost of my legal advice during the settlement agreement process?

The cost of legal advice is usually covered by the employer and stipulated within the agreement. Thompsons Solicitors will not charge you more than your employer’s contribution of costs and you will receive 100% of the payment. We will not take any deductions.

What happens if I don’t sign my settlement agreement?

Settlement agreements are voluntary and you do not have to sign an agreement if you do not accept the terms. If not signed, the agreement is invalid and you are able to bring or continue any potential legal claim against your employer. You would remain employed and your employer may consider ending your employment by an alternative means, such as by following a disciplinary procedure or capability process.

Does it matter what my employer calls the reason for my termination of employment?

Yes. We will ensure, based on your circumstances, that your agreement is correctly worded.

Why should I instruct Thompsons to help with my settlement agreement?

Thompsons Solicitors has a dedicated team of specialists who deal solely with advising and supporting people through the settlement agreement process. We have significant experience of working across a whole range of workplaces which we use to secure the best agreement terms possible. We pride ourselves on our efficient and fast-paced service, finalising settlement agreements with even the most urgent deadlines.