Settlement agreements: what to check before you sign

What is a settlement agreement?

A settlement agreement is a legally binding contract between you and your employer. You agree not to bring claims against them, such as unfair dismissal or discrimination, and in return they pay you an agreed sum and agree other terms, such as a reference. Before 2013 it was called a compromise agreement.

They’re common on redundancy, after a grievance or dispute, or when an employer wants someone to leave quickly and quietly. Your employer may first raise it in an off-the-record “protected conversation”, which usually can’t be used as evidence in an unfair dismissal claim later.

Why you must get legal advice

The law protects employees from signing away their rights without understanding them. A settlement agreement only stops you bringing statutory employment claims if:

• it’s in writing and relates to particular complaints
• you’ve received advice on its terms and effect from a relevant independent adviser, such as a solicitor
• the adviser is named in the agreement and has professional indemnity insurance
• the agreement states that these conditions have been met

Your adviser then signs a certificate confirming the advice was given. Without it, the agreement doesn’t stop you making statutory claims, which is why employers insist on it.

Who pays for the advice?

Usually your employer. Most agreements include a contribution towards your legal fees, paid directly to your solicitor, and it often covers the whole fee. Your solicitor should tell you before starting if there would be anything for you to pay.

What to check before you sign

The money

Ask for a clear breakdown. It may include:

• a compensation or “ex gratia” payment for losing your job
• statutory redundancy pay, if you’re being made redundant
• pay in lieu of notice
• salary up to your leaving date, and any accrued but untaken holiday
• bonus, commission, pension contributions or share options you’ve earned

Check the payment date too. Most agreements pay within 14 or 28 days of your leaving date or of the signed agreement being returned.

Tax

The first £30,000 of a genuine compensation payment for losing your job, including statutory redundancy pay, is usually free of income tax and employee National Insurance. Anything above that is taxed as income. Notice pay, holiday pay, salary and contractual bonuses are taxed in the normal way, even when they’re paid under a settlement agreement. Many agreements also make you responsible for any further tax that turns out to be due, so it’s worth getting the split right.

The claims you give up

You’ll usually waive every claim you have, or might have, against your employer. Before you sign, your solicitor checks whether you might have a claim worth more than the offer, such as unfair dismissal, discrimination, unpaid wages or whistleblowing. Some things normally can’t be signed away, including accrued pension rights and the right to enforce the agreement itself.

You’ll often be asked to confirm, or “warrant”, that you know of no other claims and haven’t been offered another job. If that turns out to be untrue, you could have to repay the money.

Your reference

Ask for the agreed wording to be attached to the agreement, so you know exactly what a future employer will be told.

Confidentiality and other terms

• Confidentiality: you’ll usually agree to keep the terms private. It can’t stop you reporting a crime or making a protected whistleblowing disclosure.
• Not making negative comments: check whether this applies to your employer as well as to you.
• Restrictions on future work: look for clauses limiting who you can work for, or which clients you can deal with, after you leave.
• Repayment clauses: some agreements let your employer reclaim the payment if you break a term.

Can I negotiate?

Yes. A settlement agreement is an offer, and first offers often improve. The strength of any claims you might have, your length of service, your notice period and how much your employer wants a quick, clean exit all affect what you can ask for. Your solicitor can advise on what’s realistic and, if you want, put a counter-proposal to your employer.

The Acas Code of Practice on settlement agreements suggests employees are given at least 10 calendar days to consider an offer. Don’t let a deadline rush you into signing something you haven’t had checked.

How the advice works

Send the agreement, your contract and recent payslips to your solicitor. They go through the terms with you by video or phone call, answer your questions and, once you’re happy, sign the adviser’s certificate and return it to your employer, often within 24–48 hours. See settlement agreement advice.