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Settlement Agreements


A ‘settlement agreement’ is a legally binding agreement following the termination of your employment. It usually provides for a severance payment by your employer, in return for which you agree not to pursue any claim you may have to an employment tribunal. Quite often, the settlement agreement will also deal with the notice element in your contract of employment and may provide for a ‘payment in lieu’.

Employers are now increasingly using settlement agreements as a mechanism for preventing possible future complaints to a tribunal, especially in redundancy situations. Settlement agreements are recognised by statute and are the only way a claim can be legally binding without tribunal proceedings having been initiated.

You must have the settlement agreement explained by an independent solicitor before the agreement becomes binding.

The solicitor giving the advice must also sign the agreement and certify that the appropriate advice has been given.

What terms does a Settlement Agreement have to contain?

The settlement agreement will state the full breakdown of the payments you are receiving and the extent to which the sums will be paid free of tax. Usually, up to £30,000 compensation can be paid without deduction.

The settlement agreement will also provide for confidentiality both in terms of your employers trade secrets and business affairs and also of the terms of the agreement. You will also usually be required not to make any derogatory comments against your employer.

The settlement agreement may confirm the existing post-termination restrictive covenants that you are already bound by under your contract of employment. In some cases, the covenants are new, having appeared in the settlement agreement for the first time. In either case, you need to take specific advice on this as your ability to work for a competitor and/or service old clients and customers could be hampered after you leave.

There will be a long list of statutes in the settlement agreement (such as the Race Discrimination Act, Sex Discrimination Act, Employment Rights Act) and many more, under which you will agree not to bring a claim. You should not be concerned by this. The settlement agreement is intended to be in full and final settlement of all claims but the employer needs to list these to be able to enforce the agreement.

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