Settlement Agreements

Last updated: 19th May 2021

Your 10 top tips for understanding what they are, when they can be used, and how to strike the best deal.

The following information sets out your top tips for understanding what they are, why you might be offered one, whether you should agree to the terms, and what you should expect to be included.

We will also provide valuable insight into how to avoid some common mistakes, what to do if the terms of your agreement are breached, and your options where an agreement cannot be reached with your employer/former employer.

1. What is a Settlement Agreement?

A settlement agreement is a legally binding contract that can be used to bring an end to your employment contract by the mutual consent of you and your employer.

It will set out the terms upon which your employment is ended and settles all legal claims you may have against your employer. On acceptance, this will mean that you cannot then advance a claim against your employer at Employment Tribunal. As compensation for your employment coming to an end, your settlement agreement will normally include a financial element.

Until 2013, these agreements were known as compromise agreements, so can sometimes be referred to as such. There are also other ways in which your employer may refer to such an agreement, including:

• Mutually-agreed resignation
• Termination agreement
• Ex-gratia payment
• Gagging clause
• Golden goodbye

A settlement agreement is commonly offered following a ‘protected discussion’ with your employer.

What is a protected discussion?

Usually proposed in the context of bringing your employment to an end, this is a confidential ‘off the record’ discussion. The contents of which cannot be included in any potential legal proceedings between you and your employer in the future.

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Is a ‘protected discussion’ the same as ‘without prejudice’?

In essence, both of these afford you the opportunity to have a confidential ‘off the record’ meeting/discussion with your employer.

A without prejudice discussion would be used where you have an existing dispute with your employer. Where there is no existing dispute a protected discussion would take place. Most typically, it would be proposed where the situation relating to your leaving is reasonably straightforward.

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Whilst settlement agreements are usually used in relation to the termination of employment, they can also be used as a tool to resolve matters that do not require your contract to be terminated.

For example, an internal dispute with your employer may be brought to a close without any ongoing unpleasantness or upheaval in your working relationship.

What is a COT3 settlement?

In so much as it serves the purpose of resolving an employment related dispute without the need for a tribunal hearing, a COT3 settlement has a similar purpose to a settlement agreement.

However, this type of agreement is one that is administered by the Advisory, Conciliation and Arbitration Service (ACAS). Whilst also legal binding, a COT3 agreement does not require separate legal oversight.

Where you have made the decision to pursue a claim against your employer at Employment Tribunal, it is a legal requirement for you to first participate in the process of ACAS early conciliation.

A conciliator will be appointed to your case by ACAS. They will contact your employer to try and resolve your dispute by way of a COT3 settlement, thereby avoiding a tribunal hearing.

If offered, you are not under any obligation to accept a COT3 settlement and can move forward with advancing your claim via a tribunal hearing.

For more details on how to advance your claim visit our Employment Tribunal page.

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2. Why would my employer offer me a settlement?

A settlement agreement could be offered to you for a variety of reasons and it does not always suggest that you have done something wrong.

On occasion, one can simply be offered as a means to end your employment because the relationship with you has not worked out as they had hoped. For example, they may deem this solution a lot less stressful for both parties than going down the road of consultations and investigations.

Other reasons, may include:

• You have a long-term illness, preventing you from returning to work
• Your employer is not happy with your performance at work
• You have had a complaint lodged against you by a colleague
• Your employer is undergoing a business re-structure
• You have been discriminated against in the workplace

Where you are pursuing a claim at Employment Tribunal, your employer could simply propose a settlement agreement to avoid the time and costs of defending it.

Can I make a request for a settlement?

This is a very common question. The answer is yes.

Though it is more common for an employer to suggest a settlement agreement for the types of reasons set out above, there is nothing to stop you in instigating a ‘protected discussion’ to elicit a potential settlement.

After all, if your relationship has deteriorated they may be happy to know you are willing to discuss favourable terms to end your employment, with the minimum of fuss.

3. Do I have to accept my employer’s offer?

For example, if it was offered to you because they were restructuring, declining to accept it could result in your employer commencing a redundancy process instead.

You do have the option of negotiating the terms with your employer, so if you feel you have a strong case you can always put forward a counter offer.

Keep in mind that where your employer has asked you to consider a settlement agreement, this suggests that they want you to go with the minimum of fuss. In itself, this indicates they may be prepared to pay more to make this happen.

How long do I have to consider my settlement offer?

When offering you a settlement, your employer is expected to give you a reasonable amount of time to consider it and take advice.

ACAS recommend that you are given at least 10 days to take legal advice.

4. Do I have to use a solicitor if I want to accept my settlement agreement?

Yes, as a settlement agreement is legally binding you will need to fully understand the implications of signing. For this, you will need to take legal advice.

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Do I have to end my employment if I reached an agreement with my employer?

As a legal means of achieving a clean break from your employer/former employer, most settlement agreements result in bringing an end to your employment contract.

Once I have signed, what happens next?

When you are happy with the legal advice you have received, signed and returned it to your employer, you will have accepted the terms of your settlement agreement.

Your employment will end on your specified termination date and you can then expect your payment, either within 14 days or the following payday. As set out in the payment schedule section of your agreement.

5. What are the potential benefits compared to going to tribunal?

Simply put, pursuing a claim at Employment Tribunal can be stressful, time consuming, and there is no guarantee of success.

A settlement agreement on the other hand can bring a quick resolution to your dispute and avoid the potential for an uncertain tribunal outcome. This clean break gives you and your employer the assurance that your matter has been resolved.

Also, a settlement package does not just give you the comfort of financial compensation, it will commonly include other benefits such as a reference. This can be an important element in helping you secure a new job.

6. How is a settlement agreement reached?

Before your agreement can be reached 4 fundamentals must be adhered to, namely:

• Your settlement agreement must be presented in writing
• It must relate to the specific dispute in question, or your reason for proceeding
• It is ‘mandatory’ that you receive legal advice on the terms and effect of the agreement you are being asked to sign
• The agreement will name your legal advisor

It is important to remember that you are not obliged to participate in a ‘protected discussion’ or agree to a settlement. It is entirely your choice.

Sound legal advice will ensure that the settlement agreement you have reached with your employer is in your best interests.

What is likely to happen if we can’t reach an agreement?

Where you and your employer cannot reach a settlement agreement to resolve your dispute, other suggestions may be put to you, such as:

• The offer of mediation
• Putting you on an Performance Improvement Plan (PIP)
• Commencing a disciplinary procedure
• Proposing you raise a grievance

Always keep in mind that if any of the above are taken up and you then find yourself dismissed, if your employer failed to carry out the proper procedure you may have grounds for advancing an unfair dismissal claim at tribunal.

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7. What standard sections should be included?

Whilst the terms can vary, your settlement agreement should contain a number of standard sections, including (but not limited to):

Outstanding Salary & Entitlements

Your agreement will specify a termination date and will provide for you to be paid all outstanding salary and entitlements. These will include holiday and notice pay, contractual bonuses or commissions, contractual payments such as in lieu of notice or gardening leave pay.

This element of your settlement package will be subject to tax and national insurance.

Ex-Gratia Payment

This will be the element of financial compensation offered to you for losing your job.

This part of your settlement will be tax free up to £30,000.

Tax Indemnity

Whilst your ex-gratia payment is tax free up to £30,000, you will normally be required to indemnify your employer in respect of any tax that may be payable as a result of your individual tax arrangements.

Company Property and Information

This will set out the company property you are required to return on or before your termination date. You should expect this to be comprehensive and it is likely to include such items as your company car, laptop, and mobile. It will also include any security passes, ID, company documents and keys in your possession.

It is also not uncommon that this section will specify your requirement to provide details of any employment related passwords you hold, and the deletion of all company information held on any electronic devices that you will be retaining once your employment has been terminated.

Employment Reference

This will contain the reference your employer agrees to provide on request. Within this section it is usual for your employer to ‘reserve their right to alter’ this reference if any information is brought to their attention that may change their position.

Payment Schedule

This will set out the financial settlement you will be paid and when it will be paid to you.

8. What common clauses should I expect to be included in my settlement agreement?

Alongside the standard sections laid out above, you need to be aware of the common clauses that will appear in the majority of settlements.

Understanding why they are included will help you appreciate the effects of signing your agreement.

Full and Final Settlement/Waiver of Claims

The importance of this clause cannot be understated.

When you accept/sign your settlement agreement you will be waiving all legal claims you may have against not only your employer, but also their associated companies, shareholders, directors and employees.

This will apply to any claims that may arise in the future (both within the UK and abroad), of which you may have had knowledge at the time of signing. This not only applies to Employment Tribunal claims, but also to those you could bring in the County Court or High Court.

Your agreement will commonly list a variety of claims that you could bring against your employer, which by signing you specifically agree to waive. For example, you will be waiving your right to a future personal injury claim you may have been considering for physical injury in the workplace.

No Further Payments or Benefits

This clause stipulates that apart from the financial settlement due to you under the terms of the agreement, you confirm that no further monies (or benefits) will be due to you after the termination of your employment.

Indemnities

Alongside you indemnifying them against any tax demanded from you by HMRC, your employer may also include a clause to indemnify them in the event you breach the terms of the agreement.

This would be in respect to any legal costs or damages they might incur to defend any legal proceeding you may instigate as a result of such a breach.

Judicial Proceedings

Commonly, a clause will be included by which you agree to make yourself available should your employer need you to participate in any future judicial proceeding i.e where they may need you to appear as a witness on their behalf.

Warranties

Your employer may want you to agree to a number of specific warranty clauses as they have agreed to pay you a financial settlement. Some of the most common, include:

• That you are not aware of any personal injury claim you might have against them
• No form of legal proceeding has already been issued by you against them (this will also specify that if you do so in the future, all monies paid to you as part of your settlement agreement will be repayable to them in the form of a debt)
• Once your employment is terminated, you will not promote yourself as being connected to them
• You will withdraw any appeals, grievances or subject access requests that you have previously made. You will also not pursue any future ones.
• You are not aware of any circumstances under which your employer could have terminated your contract without notice i.e a serious (repudiatory) breach of contract, such as gross misconduct.
• As at the date of signing you have not received alternative employment, and/or have no expectation of receiving an offer of paid employment

Confidentiality and Non Disclosure

Normally, your employer will require you to agree to maintain the confidentiality of information you have come into contact with during the course of your employment. This will include adherence to any confidentiality provisions within your employment contract.

They will also require you to keep the details and existence of your settlement agreement confidential, including the negotiations. You will be deemed to be in breach of this if you discuss your agreement details with anyone outside you immediate family or your legal advisors.

Restrictive Covenants

If you have been subject to ‘post-termination’ restrictive covenants, such as not being permitted to work for a competitor for a period of time once your employment comes to an end. These will continue to be enforceable and binding under the terms of your settlement agreement.

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Common pitfalls, clauses within settlement agreements to be careful of!

Settlement agreements can often include clauses that you need to be wary of.

Most notably, the clause that specifies ‘As at the date of signing you have not received alternative employment, and/or have no expectation of receiving an offer of paid employment’.

This is a clause that many fall foul of by being found to have attended an interview and offered a new job prior to signing their settlement agreement.

Where your employer finds this to be the case, you will be deemed to be in breach of the terms of your agreement and have to repay any monies paid to you.

3 other common clauses to be wary of are:

Retrospective clauses

Our settlement agreement solicitors would always recommend having these removed.

These can include where you are required to confirm that prior to signing, you had not discussed your agreement with anyone other than your legal advisors and immediate family.

Personal Injury Claim clauses

Where you have an existing or potential workplace personal injury claim, our solicitors would advise against signing a settlement agreement. Or, seek to negotiate your right to continue or advance a claim under the terms of your agreement.

Restrictive Covenant clauses

Where any restrictive covenant prevented you from working after your employment has been terminated, we would recommend negotiating a formal release from them under the terms of your settlement.

9. Is a settlement the same as redundancy?

Whilst settlement agreements are commonly used in redundancy situations, you need to be aware that they are not the same as your redundancy package.

Your employer may, for example, choose to offer you a settlement rather than go through a redundancy consultation with you.

This would mean you may not then get additional redundancy pay you may have been entitled to through your contract or statutory redundancy pay. But, you could receive pay in lieu of notice for agreeing to a settlement agreement instead.

10. What should I do if my employer breaches the terms of my settlement agreement?

As a legally binding contract, your settlement agreement overrides all previous arrangements with your employer.

So, if you find your employer is in breach of its terms, you will need to bring a ‘breach of contract’ case against them. If this breach took place before your employment came to an end you would need to advance a claim at Employment Tribunal. Where the breach occurs after your termination date, you would seek recourse to legal action via the County Court.

Unfortunately, you cannot revisit a claim you may have had against them prior to your agreement and will not be able to ask to be re-instated. Your only option is to pursue a claim of breach of contract.

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If you have been offered a settlement agreement

Our team of specialist settlement agreement solicitors are ready to help you now.

If your employer has offered you a settlement agreement you will need a solicitor to handle it for you. Don’t forget, your employer pays not you!

Call us now on 0203 838 0781 or 0203 838 0781. We could also negotiate a better deal for you.

Or, if you have been offered a settlement but want to reject it to pursue a claim at tribunal, our friendly and approachable team will be happy to assess the merits of your case.

Either call us, or if you prefer, submit your details via our 24/7 online enquiry form. On receipt of your information we will respond to you within 48 hours via phone, text or email.