Whether you’re facing redundancy, resolving a dispute or hope to leave on amicable terms, settlement agreements offer a simple, legally binding contract between employers and employees.

In return for agreeing not to bring any claims in an Employment Tribunal and being reasonable after you leave, you’ll normally get an enhanced payment plus protections for your reputation such as an agreed reference.

By using our ‘same-day’ settlement agreement service, we’ll make things simple for you, explaining everything in plain English so you feel confident and informed. And once you have signed, you’ll be free to start looking for a new job with clarity.

What is a settlement agreement?

A settlement agreement is a legally binding contract between an employer and an employee. It outlines specific terms under which the employment relationship will end or a dispute will be resolved.

Employers typically use settlement agreements to:

Resolve workplace disputes and avoid tribunal claims.
Formalise redundancy arrangements.
Conclude employment relationships amicably and with clear terms.

The key feature of a settlement agreement is its finality. Once signed, the employee waives their right to bring work-related claims against their employer. In return, the agreement often includes a financial compensation payment.

Legal requirements

For a settlement agreement to be valid, the employee must:

Receive independent legal advice to ensure they understand the terms and implications of the agreement.
Be advised by a qualified professional who is covered by professional indemnity insurance.
Agree to the terms of the agreement (these must be clearly outlined), including the specific claims being waived.

To be valid, the settlement agreement must also comply with relevant employment laws and regulations. It must also be in writing.

Employers must allow the employee sufficient time to consider the settlement agreement offer (which is normally 10 days) and obtain advice, ensuring there is no undue pressure to sign.

What’s included in a workplace settlement agreement?

While the specifics of each settlement agreement contract are mainly standard and should include:

Financial compensation: Details of the payment you’ll receive, such as redundancy pay, notice pay, or an ex-gratia sum compensation or termination payment).
Confidentiality clause: An agreement to keep the terms of the settlement and the circumstances surrounding it private.
Waiver of claims: A list of employment law claims (such as unfair dismissal or discrimination) you agree not to pursue against your employer.
Reference provision: Details of the reference your employer will provide to any future employer.
Non-disparagement clause: A mutual agreement stopping negative comments about one another.
Legal costs: Confirmation that your employer will cover the cost of your legal advice.
Notice arrangements: The notice your employer will give you under your contract. This may be worked, served on ‘garden leave’ or paid in lieu (up front).
Employee warranties: Promises by you such as: you haven’t hidden any misconduct and haven’t got a job offer.
Benefits: Details of healthcare, pension contributions, car allowance etc. Sometimes these can be extended beyond employment.
Handover and practical steps: Details on returning property, passwords, deleting employer work from personal devices, etc.
Tax implications: Clear details on how various payments will be treated for tax purposes, ensuring you understand the potential liabilities or benefits.
Consequences: Information on what will happen if either party breaches the terms of the settlement agreement.
Post-termination covenants: Clauses to protect the employer’s business interests (e.g. non-compete and non-solicitation clauses). These protections must be reasonable typically no more than six months.

What is the settlement agreement process?

The employee settlement agreement process is very simple. You will typically follow these steps set out below:

Initial proposal: The employer offers a settlement agreement, either during redundancy/termination discussions or to resolve a workplace issue. In some cases, you may be the one to request the agreement.
Client care letter: We will send you our standard terms confirming the fixed fee/employer pays our fee.
Legal advice: We’ll call at an agreed time to give you independent legal advice surrounding your workplace settlement agreement.
Negotiation: We will conduct any reasonable negotiations for you relating to financial compensation, references, or other clauses.
Signing the agreement: Once both parties are ready to go ahead, you sign, and we’ll return it to your employer with the legal adviser’s certificate. If you aren’t leaving straightaway your employer will want you to resign the day after you go.
Payment: The agreed compensation is normally paid the month after your last day at work, provided we have returned the signed settlement agreement on time.

In some cases, navigating the settlement agreement process can be stressful and all-consuming, but our expert solicitors take the pain away. Our same-day service ensures the process is finished quickly so you can leave your employment amicably with peace of mind.

What is a reasonable settlement agreement?

A reasonable settlement agreement reflects fair compensation for the employee while protecting the employer’s interests. Things to think about include:

The nature of the dispute or redundancy/termination (with redundancies there normally isn’t one).
The length of your service, your position at the company, and the amount of your salary.
Potential claims you might consider bringing
The amount these claims are likely to secure at a Tribunal
How long it may take to find another job.

The settlement agreement should be tailored to your specific circumstances and the legal considerations at hand.

How long after a settlement agreement do I get paid?

The payment timeline is normally 30 days after signature and this should also be specified within the settlement agreement. The payments to be received might include:

Salary payments: These tend to be paid as usual until the end of your employment.
Termination payments: Any ex gratia sums due are likely to be paid after your employment ends. Most employers process these payments promptly, often within 7 to 28 days.
Statutory redundancy pay: This is a tax-fee payment which is capped. This payment is also made after your employment has ended.
Bonuses: Any bonuses owed will depend on the specific terms outlined in the agreement and whether the performance criteria were met.
Payment in lieu of notice and holiday pay due: If you are entitled to PILON and/or holiday pay, this may be included in your final salary or paid separately, depending on the agreement.
Pension contributions: Contributions to your pension scheme usually continue until the end of your employment, but any additional arrangements should be clearly outlined in the agreement (e.g. tax-free payments).

The payment terms and timelines must be clearly outlined in the settlement agreement to prevent delays.

Is a settlement agreement right for you: The big issues

Settlement agreements avoid the stress of fighting an employment claim or tense negotiations. They deal with all the issues related to leaving in one go.

You don’t have to sign a settlement agreement. If you have a strong employment claim and want to pursue it, you may want to consider the ACAS and Employment Tribunal route but when you do, the main thing is assessing what we call the ‘pain to gain’ test.

You may end up with a higher payment, but you need to think about the time, energy, damage to your career and not least the emotional toll of pursuing a legal claim compared with a settlement.

Things to consider when deciding whether to sign a settlement agreement include:

Future plans: Where do you want to be next, and how does the agreement support that?
Financial outcomes: Compare what you’ll take home under the agreement to what you might receive after costs and lost tax efficiency at a tribunal.
Employment prospects: If you can find another job relatively quickly, the stress and uncertainty of pursuing a legal claim may not be worthwhile.

By considering these factors, you can make a well-informed decision about whether to proceed with the settlement agreement.

Advantages of settlement agreements

Settlement agreements provide several benefits for employees, including:

Certainty: Clear terms regarding compensation and employment termination.
Speed: A quicker resolution compared to lengthy legal proceedings. The process is even swifter when using a same-day service.
Confidentiality: Protection of sensitive information for both parties.
No legal costs: Employers pay for the employee legal advice on the settlement agreement.
No legal fees: Up to 33% of any tribunal award or settlement may go on legal fees at a tribunal.
Tax efficiency: Compensation payments are tax-free up to £30,000.
Reputation: Settlement contain an agreed reference and protection from negative comments by the employer.
Career prospects: Avoids unresolved legal issues that may put-off potential employers.
Litigation risk: There’s always a risk of losing if you pursue a tribunal claim.
Stress: Tribunals are stressful and can take over a year to reach a hearing.
Avoids conflict: If you opt for litigation you may have to deal with former colleagues as adversaries. This can be particularly unpleasant.

Are there any disadvantages to a settlement agreement?

While generally advantageous, settlement agreements may have downsides:

Waiving legal claims: Once signed, you lose the right to bring claims against your employer related to the agreement.
Confidentiality restrictions: Limitations on discussing the terms of the settlement agreement/termination may feel restrictive, especially if you feel wronged.
Lack of legal knowledge: Employees may feel confused about the terms of the agreement and their fairness. This emphasises the importance of legal advice.
Employment restrictions: Having to agree to certain clauses can be off-putting. However, non-compete clauses in settlement agreements are only enforceable if they are reasonable in scope, geography, and duration.

How much will a settlement agreement cost?

For employees, legal advice for a settlement agreement is provided at no personal cost as your employer covers the legal fees.

Your employer will pay our fee which is normally £350 and £500 (plus VAT). The fee covers advice on the agreement and reasonable negotiations and ensures you get access to expert guidance without incurring financial strain.

Why do companies offer employee settlement agreements?

Companies offer settlement agreements for several reasons, including:

Avoiding tribunal claims
Settlement agreements help employers avoid the financial and reputational risks of protracted legal disputes. By resolving issues early, both parties can move forward without the time and expense of a tribunal. Settlement agreements also help employers and employees to part ways on mutually agreed terms, reducing animosity and maintaining professional respect.

Formalising redundancy processes
Settlement agreements are often used during redundancy situations to provide clarity and assurance for employees, while protecting the employer from potential claims.

Protecting confidentiality and business interests
Employers value the ability to safeguard sensitive information about internal disputes or organisational decisions, ensuring reputational integrity. These agreements may also include provisions to safeguard intellectual property, trade secrets, and business relationships from potential misuse.

Maintaining workplace morale
By resolving disputes swiftly and professionally, employers can minimise the impact on team morale and avoid the adverse ripple effects of unresolved issues.

How to negotiate a settlement agreement

When negotiating a settlement agreement, a clear understanding of your rights and priorities helps to ensure a fair outcome. To get the most out of your agreement, you should:

Understand your value: Consider factors like your length of service, experience, potential claims, and financial needs.
Seek legal advice: A solicitor can identify areas for improvement and advocate for better terms.
Maintain professionalism: Approach discussions calmly and collaboratively to avoid tension and the escalation of any disputes.
Highlight key concerns: Address areas like references or restrictive covenants during negotiations.

ACAS’s Code of Practice on Settlement Agreements offers valuable recommendations to help ensure transparency and fairness during negotiations.

Our same-day service will support you through the negotiation process with speed and precision. We understand the urgency and importance of securing a fair settlement agreement, which is why our team of experts:

Provides immediate advice on the terms of your agreement.
Identifies opportunities to negotiate better compensation, references, or clauses.
Ensures your interests are protected.
Facilitates a stress-free process, allowing you to confidently focus on your future.

My settlement agreement says ‘without prejudice’ – what does that mean?

The term ‘without prejudice’ means discussions and offers made during settlement negotiations cannot be used as evidence in any future court or tribunal proceedings. This encourages open dialogue and protects both parties during negotiations.

Can I get a job after a settlement agreement?

Signing a settlement agreement doesn’t stop you from looking for a new a new job once your notice period has passed. But there may be non-compete or confidentiality clauses – which you should discuss with any future employer. Normally they stop you taking your current employers clients for 6 months.

As such, it’s crucial to:

Review restrictive covenants: Understand any limitations on working for competitors or in specific industries.
Request references: Ensure your agreement includes a clause about references to support your job search.

Most employees move on successfully after signing a settlement agreement, particularly with a fair reference in place.

Same-day settlement agreement legal advice

To avoid a protracted process, our same-day service ensures your settlement agreement is reviewed, negotiated, and signed promptly. With expert guidance, you can:

Gain clarity on your rights and obligations.
Ensure fair terms and compensation.
Leave your role with confidence and peace of mind.

Settlement agreement FAQs

Are settlement agreements taxable?

Compensation up to £30,000 is generally tax-free and all other payments are subject to tax and National Insurance.

Payments from an employer direct into your pensions can be made without being taxed. The payment must adhere to the annual pension contribution limit. Contributions beyond this limit could incur tax charges.

What is a PAYE settlement agreement?

A PAYE settlement agreement (PSA) is an arrangement between an employer and HMRC that allows the employer to cover the tax and National Insurance contributions on certain employee expenses or benefits. This is unrelated to individual settlement agreements.

Can an employee request a settlement agreement?

Yes, employees can request a settlement agreement if they feel it’s the best way to resolve a workplace dispute or facilitate a smooth exit. However, the employer must agree to engage in such discussions.

Is a settlement agreement the same as redundancy?

No, a settlement agreement and redundancy are not the same. Redundancy refers to the termination of employment due to reduced business needs, while a settlement agreement is a voluntary contract that resolves employment disputes or ends a contract of employment on agreed terms. However, settlement agreements are often used to help employers avoid the formal redundancy procedure.

Are settlement agreements confidential?

Yes, settlement agreements typically include confidentiality clauses that require both parties to keep the terms and circumstances of the agreement private. However, there are exceptions to this rule. For example:

Public interest disclosures: Discussions involving whistleblowing or reporting unlawful activities may not be confidential, as public interest overrides confidentiality agreements.
Legal obligations: In some cases, disclosure may be required by law, such as during legal proceedings or regulatory investigations.

Can a settlement agreement be overturned?

In rare cases, a settlement agreement can be challenged or overturned if it was entered into under duress, fraud, or misrepresentation. It’s crucial to ensure all terms are understood before signing.

Do I have to sign a settlement agreement?

No, you are not obligated to sign a settlement agreement. Legal advice will help you understand the implications of signing and decide whether the agreement meets your needs.

Does a settlement agreement affect benefits?

A settlement agreement can impact government provided benefits, particularly if you receive a large lump sum payment. It’s advisable to seek guidance on how any payment might affect your entitlements.

Contact our settlement agreement solicitors

With over 30 years’ experience and having processed over 1,000 settlement agreements, we have a proven track record in supporting employees through the process.

We offer a same-day service and your employer will pay our fees, so there is no cost to you. Contact GTE settlement agreement solicitors today on 020 7247 7190 or complete our website enquiry form.

Settlement Agreements Explained