A Comprehensive Guide to Settlement Agreements in England & Wales

What Is a Settlement Agreement?

A settlement agreement is a legally binding contract between you and your employer that ends your employment contract on mutually agreed terms. 

Before signing, employees need an independent legal adviser to check your offer is fair and reasonable, negotiate the terms of settlement if appropriate and ensure you understand the implications of signing such an agreement. 

Settlement agreements are usually drafted by your employer and become binding once signed by the employer, employee, and your legal adviser.

Signing an agreement

What Is the Difference Between a Compromise Agreement and a Settlement Agreement?

The Enterprise and Regulatory Reform Act 2013 made a few changes through which ‘compromise agreements’ were renamed settlement agreements and new provisions (Section 111A) were inserted into the Employment Rights Act 1996 (ERA).

A settlement agreement can be used to end an employment relationship on agreed terms. Unlike a compromise agreement, which could be used to resolve ongoing workplace disputes.

What Is the Process of Entering Into a Settlement Agreement?

Your employer will supply you with a draft settlement agreement. As an employee, you will then need to obtain independent legal advice before signing a settlement agreement.

Your legal fees associated with the independent legal advice are usually paid for by your employer.

If an agreement is reached, then the following must be met in order for the settlement agreement to be comprehensive:

  • It must be in writing.
  • It must cover any specific dispute you are having.
  • It must set out what you and your employer have agreed.
  • It must include an ‘Independent Legal Adviser’s Certificate’.

If your employer breaches the agreement after it has been executed (for example, does not make payment in accordance with the settlement agreement) you can claim for breach of contract and should talk to a legal adviser for further guidance.

Negotiating Your Settlement Agreement

Negotiating the terms of a settlement agreement is crucial. This can include the financial compensation amount, non-financial benefits, confidentiality clauses, and terms related to post-termination restrictions. Effective negotiation can lead to a more favourable settlement, especially in cases of unfair dismissal, discrimination, or whistleblowing.

Key Factors Influencing Settlement Amounts

The amount you should expect in a settlement agreement varies greatly and is influenced by several factors, including the strength of your case, the employer’s offer, and the potential outcomes of an employment tribunal. The amount may also reflect compensation for any unlawful treatment you have experienced at work, as well as for non-financial benefits like an agreed reference.

Is a Settlement Agreement Taxable?

The tax treatment of settlement agreements is complex. Generally, payments up to £30,000 can be made without deductions for tax, but this depends on the nature of the payment. This is called a compensation payment or an ex-gratia payment.

The Next Steps: What Does our Independent Legal Advice Entail?

  • An in-depth review of the settlement agreement and all associated documentation, such as your contract of employment, notice of termination and redundancy calculations.
  • A meeting with you (in-person or virtually) in order to advise you of the main terms and effect of the agreement and implications of signing such an agreement.
  • A review of quantum, i.e., ensuring your statutory redundancy pay has been calculated correctly (Statutory Redundancy Calculator) and that the severance payment is within the bracket that we would expect in our experience.
  • We will liaise with your employer to finalise the terms of the agreement and facilitate execution of the same.
  • We will execute the Independent Legal Advice certificate.

SRB: Get the Right Independent Legal Advice

The prospect of negotiating a settlement agreement can be daunting when faced with unfamiliar circumstances during your redundancy or termination employment. Our experienced solicitors are on hand to help you navigate these negotiations and provide you with tailored advice. At Stone Rowe Brewer, we are here to help.

Get in touch with a member of our Dispute Resolution and Litigation Department, who will act as your independent legal advisers over your settlement agreement.