Settlement Agreement for Employees

A settlement agreement is a formal written agreement between an employer and an employee. They are commonly used where employment is ending, or where there is an existing workplace dispute that both sides want to resolve without going through a longer formal process or an Employment Tribunal (ET).

By signing, and depending on the wording of the agreement, you will usually agree not to bring certain legal claims against your employer. In return, your employer may offer compensation and other agreed terms.

Settlement agreements are voluntary and you cannot usually be forced to sign one; however, it is important to take advice quickly so you understand your position, the value of any claims you may be giving up, and whether the terms can be improved.

Employers often use settlement agreements to achieve a clean break and reduce the risk, cost, and management time involved in a dispute or termination process.

Common situations where settlement agreements might be introduced include:

• Redundancy
• Performance or capability concerns
• Disciplinary issues
• Grievances or workplace disputes
• Senior exits
• Mutual agreements to end employment

For employees, a settlement agreement can offer certainty, speed, an agreed reference, and a financial package without the stress and delay of tribunal proceedings.

A settlement agreement is only legally binding if you receive advice from an independent adviser and the agreement meets the statutory requirements. That is one of the key protections built into the process for both employers and employees.

Taking legal advice helps you understand:

• What claims you are being asked to waive
• Whether the compensation is fair
• Which payments are taxable and which may be tax free
• Whether the reference wording protects your future job prospects
• Whether confidentiality or non-disparagement clauses are reasonable
• Whether any post-termination restrictions should be changed or removed

At TLW Solicitors, our experienced employment solicitors can explain the agreement in plain English and advise you on whether the terms reflect your circumstances.

Settlement agreements usually cover more than just the final payment you will receive from your employer. They often set out the full terms on which your employment will end, including what you will be paid, what rights you are giving up, and what both sides agree will happen after your employment has finished.

The financial side may include:

• salary up to your leaving date
• payment in lieu of notice
• accrued but untaken holiday pay
• bonuses or commission, where applicable
• a compensation payment, sometimes described as an ex-gratia payment

The agreement may also include non-financial terms such as:

• an agreed reference
• confidentiality clauses
• non-disparagement terms
• the return of company property
• post-termination restrictions
• garden leave arrangements
• outplacement or career support

These provisions can have a real impact on what happens next, particularly if you are moving into a new role and want to protect your reputation, your future opportunities, and the way your departure is handled.

The first draft of a settlement agreement is not always the best or only version.

Depending on the circumstances, it may be possible to improve matters such as:

• a higher compensation payment
• a greater contribution towards legal fees
• more favourable reference wording
• clearer or more balanced confidentiality terms
• mutual non-disparagement wording
• a later termination date
• continued benefits for a longer period
• changes to restrictive covenants

Whether that is realistic will depend on the facts of your case and the terms originally offered. We can advise you on whether the offer is reasonable and whether there is scope to seek changes.

If you have been offered a settlement agreement, we can help you understand exactly what it means before you sign. Even where the document appears straightforward, the wording can affect your legal rights, the payments you receive and the way your employment ends.

We can assist with:

• reviewing the agreement in full
• explaining the legal effect of the terms in plain English
• advising on the fairness of the financial package
• identifying the claims you may be giving up
• explaining the tax treatment of payments
• negotiating improvements to financial and non-financial terms
• advising on references, confidentiality clauses, and restrictive covenants
• signing the adviser’s certificate once advice has been provided

Where your employer’s contribution does not fully cover the cost of the advice needed to sign the agreement, we will usually try to negotiate a higher contribution first. If you ask us to carry out additional work to negotiate a higher payment or improved terms, that may be charged separately.

If you would like us to go further and negotiate an improved financial package or better terms on your behalf, this will usually be treated as additional work outside the standard advice required to sign the agreement. In those cases, we charge a success fee of 30% plus VAT of any increase we secure for you. For example, if your employer originally offers £10,000 and we negotiate that figure up to £15,000, the increase achieved is £5,000 and our fee would therefore be 30% plus VAT of that £5,000.

This is broken down as follows:

• 30% of £5,000 = £1,500
• 20 % VAT on £1,500 = £450, meaning our total fee would be £1,950, leaving you with over £3,000 in additional compensation.

Our role is to make sure you understand what you are being asked to sign and that the agreement properly reflects your interests before matters are concluded.