If you’re being offered an employment settlement agreement then you have the right to get advice from a lawyer on this – our specialist settlement agreement solicitors can advise you on the settlement agreement terms you have been offered and seek to negotiate these for you
Read our guide on settlement agreements below
This practical guide, drafted by our expert employment solicitors, outlines what an employment settlement agreement is, in what circumstances you can expect to be offered a severance agreement, how much you should expect to be paid for an agreement, what happens when there is an agreement of settlement, and what key terms a settlement agreement normally includes.
An employment settlement agreement is a legally-binding contract between an employer and an employee (or, to put it another way, an agreement of settlement), under which the employee agrees to accept some form of benefit (normally a sum of money) in return for agreeing not to bring particular legal claims against their (former) employer. This is why the agreement is called a “settlement agreement” – the employee is agreeing to “settle” their right to bring certain claims in the Employment Tribunal or civil courts. We refer to these settlement agreements as “employment settlement agreements” in order to distinguish them from other types of settlement agreements that you might receive in other areas of law (for example, a divorce agreement).
Employees must receive legal advice from a qualified independent legal adviser (such as specialist settlement agreement solicitors ) before they sign the agreement. The purpose of the legal advice is to allow employees to be completely aware of their legal rights, the terms of the agreement of settlement, and their ability to present any form of claim to the Employment Tribunal. Settlement agreements between employers and employees are extremely common in England and Wales but the law stipulates that such agreements cannot be enforceable unless they meet certain “requirements”, one of which is they they receive legal adviser from an independent adviser. We will explore the other requirements later in this guide.
To explain the purpose and effect of an employment settlement agreement, we must first look at the different types of legal rights under UK law that employees may be asked to ‘waive’ under an agreement of settlement. These are explained below.
A settlement agreement/compromise agreement can be offered in any circumstances where there is a workplace dispute, and is also offered even where there is no form of dispute (for example, where there is a mutual agreement between an employer and employee that the employee will leave, or where the employee wants to retire from their employment).
The most common types of cases where settlement agreements are offered tends to be as follows (although this list is not exhaustive):
These agreements are useful, generally, to settling cases where a disciplinary or performance procedure is involved.
In most cases the employee’s employment will terminate when a settlement agreement has been agreed, but not always – the agreement of a settlement does not always mean termination of employment.
You have three broad ‘types’ of employment rights under UK law:
Contractual rights are the rights that you have under the terms of your contract of employment . These terms are either express (in writing in the contract or associated documentation) or implied (implied into the contract by, for example, custom and practice). Contractual rights include your right to a particular period of notice; holiday entitlement ; your right to receive a salary, any bonus, and/or commission; your position, place of work, and the like.
Common law rights are legal rights that derive from the common law, such as a right to pursue a claim for, for example, negligence and defamation. Common law rights are rights that can normally only be pursued in the civil courts (the County Court or the High Court).
Statutory rights are legal rights that you have under UK legislation. Statutory rights that apply in employment situations are rights that can normally only be pursued in the Employment Tribunal. Statutory rights include (among others):
Please note that this is not an exhaustive list but contains most of the ‘normal’ types of claims that an employee might have against their employer.
Employees have legal rights in the workplace (some of which are listed above), rights that can be enforced in an employment tribunal or court if their employer (or one of the workforce of the employer) does (or fails to do) something which infringes on those legal rights – normally if there is some form of dispute between an employer and an employee. However, instead of bringing a claim in the employment tribunal or civil courts, you can choose to waive your right to do so and settle your claim through what is called a “settlement agreement”.
If you wish to negotiate an employment settlement agreement with your employer then you must be careful not to prejudice your position by signing any legal documents without first taking legal advice from a qualified legal adviser (such as a solicitor or barrister, among others). If you have been offered – or wish to try and obtain – an agreement then you should seek legal advice from a specialist adviser before signing any papers – some (although not all) employers are unscrupulous and may try and pressure you into settling your claims for less than they are potentially worth.
Under the Employment Rights Act 1996, employees receive a degree of protection from such unscrupulous employers by the legal requirement that the employee must receive legal advice from an independent adviser (such as a specialist settlement agreement solicitor) for their agreement to be binding. This means that there is a legal requirement that you must seek legal advice from a legal adviser (through a solicitor, barrister, or a trade union, for example) before your settlement agreement can become enforceable. If you fail to take such legal advice then your agreement will not be enforceable and you may not be able to compel your (former) employer to pay you the sums due under the agreement. In order to properly waive your employment rights and create an enforceable settlement agreement, there must be three signatures on your agreement: your signature, a signature on behalf of your employer (by someone who is properly authorised to do so), and your legal adviser’s signature (to confirm that you have been advised as necessary on the agreement).
If you have already started Employment Tribunal proceedings against your employer then you may – instead of using a settlement agreement – use an agreement called a “COT3 agreement” to settle outstanding proceedings. You may, however, wish to take specialist legal advice from an employment solicitor (such as a specialist settlement agreement solicitor) on the terms and effect of your COT3 agreement before signing it.
Settlement agreements were previously known as ‘compromise agreements’ – their name was changed by the Government in 2013 after a consultation, with the reason being that the Government believed that the term ‘settlement’ was a better description of the settlement process (people didn’t like the idea of ‘compromising’ but they were open to the idea of ‘settling’).
In practice the two names (‘compromise agreement’ and ‘settlement agreement’) are used interchangeably and essentially mean the same thing.
It is a legal requirement that you receive independent legal advice from a lawyer (such as specialist settlement agreement solicitors) before entering into an employment settlement agreement – the purpose of this is, essentially, to ensure that the employee is not pressured into signing their rights away by their employer, as they will receive advice from a qualified independent lawyer before deciding whether to enter into it. If you instruct us then one of our specialist settlement agreement lawyers will run through your agreement with you and provide you with settlement agreement guidance, to make sure that the terms are fair and that you understand them.
As we explain above, the core purpose of a settlement agreement is to allow the employer and employee to settle workplace disputes rather than pursuing litigation.
In order for an employment settlement agreement to be valid and enforceable it must must satisfy certain conditions as set out in s.203(3) of the Employment Rights Act 1996. These requirements are as follows:
If your agreement does not meet the above statutory requirements for a settlement agreement then it will not settle your statutory claims – this would mean that you would technically be able to pursue your (former) employer for your statutory rights. However, the practical effect of doing so will probably be that you will have to pay back some or all of the severance payments made to you under the agreement).
The effect of a valid settlement agreement is that an Employment Tribunal will no longer had the jurisdiction to hear claims based on the statutory rights that you have and which are waived under your agreement. Depending upon the wording of the agreement, you may also be prevented from bringing other forms of claims, such as claims for breach of contract or common law claims (such as a claim for negligence).
Our employment law solicitors will discuss your particular circumstances with you when advising you on your agreement, and our employment lawyers will advise you separately about the rights that your employer intends to settle in your case.
When you discuss your settlement agreement with your adviser (whether this is a solicitor, barrister, or otherwise suitably-qualified person) you should ask them the following questions:
We always recommend that you speak to your friends who have either gone through a settlement agreement process in the past or have instructed a specialist employment solicitor for another reason – if they have any experience with employment lawyers then they’ll probably be able to recommend a lawyer to assist you, and you’ll have the benefit of knowing that a friend of yours trusts (or doesn’t trust) a particular solicitor. This experience can be invaluable in selecting a solicitor.
Also, if you’re thinking of instructing a solicitor then take the solicitor for a “test ride”:
It is usual for the following types of claim to be excluded under your settlement agreement (i.e. you should still be allowed to pursue these types of legal claims):
If your employer offers you an exit package or a settlement agreement then they may use one of the following phrases in putting the offer to you:
Employers also often suggest the use of an “off the record” discussion, which can be code for the offer of a settlement agreement.
Please note that employers don’t always use these phrases, but they are very common.
It is, as above, a requirement of s.203(3) of the Employment Rights Act 1996 that you consult an independent legal adviser on the terms of your agreement of settlement in order for your agreement to be valid.
The role of a lawyer (such as a specialist settlement agreement solicitor) in advising you on an agreement of settlement encompasses the following duties:
An experienced employment lawyer can also advise you on the nature of your dispute with your employer, what potential claims apply, the potential value of those claims, and what action to take against your employer.
If you instruct Redmans then a specialist employment lawyer, experienced in settlement agreement work, will undertake the advice on your agreement. They will, among other things, review the terms and conditions of your settlement agreement and advise you on what action they believe that you should take.
Technically, your legal adviser only has to advise you on the terms and effect of the settlement agreement that you are signing, with regards in particular to the effect of the agreement on your ability to pursue an Employment Tribunal claim, and does not have to advise you on the merits of your potential legal claims against your employer i.e. whether the agreement of settlement represents a “good deal” or a “bad deal” for you.
Our settlement agreement review solicitors can of course provide you with advice on the merits of your particular legal claims if you request us to do so, as well as advise you on what compensation for loss you can seek. We can also advise you on negotiating the wording of the agreement, should you wish us to do so. The cost of providing this further advice may be covered within the reasonable legal costs that your employer is prepared to pay but if you require substantive advice on these issues then it may fall outside of these reasonable legal costs. It’s a good idea to speak to your solicitor at an early stage to determine the cost of such advice and to prevent any potential misunderstandings.
Generally speaking, if the sums that your employer is willing to pay to you under the settlement agreement are higher than the sums that you would receive under your minimum contractual and/or statutory entitlement and, further, represents a reasonable assessment of the likely value of your Employment Tribunal claim, then there may be merit in signing the agreement. However, what you must bear in mind is that it is not always straightforward to estimate the value of a potential Employment Tribunal claim, particularly if you have not yet left your employment.
It can also be problematic to estimate the value of an Employment Tribunal claim in any event – compensation in Tribunal claims is mainly based upon your loss of earnings from the date that your employment terminated until a future date (normally the date on which you got another job which pays at least as much as your old job or until the date of the Employment Tribunal); it’s difficult to estimate when you might receive employment in the future and, further, it can also be difficult to predict what arguments your employer might use to reduce your compensation. Finally, the process of an Employment Tribunal claim is not always straightforward and this may mean that it could be difficult to estimate your legal costs for pursuing the claim.
However, although there are – as above – certain obstacles to valuing your settlement agreement, we will always try and provide you with the best possible advice and provide you with as much information as possible to allow you to make a reasoned decision about whether or not you wish to sign your settlement agreement.
If you’ve been offered a settlement agreement then you’ll want to know whether you’re being offered fair terms for settling your potential Employment Tribunal claims, and should therefore sign the agreement, or whether you’d be better served in bringing a claim in the Employment Tribunal to try to obtain compensation.
In order to determine whether agreement of settlement you’re being offered is fair or not, you should have reference to the following key factors:
Settlement agreements are normally used to settle the following types of potential employment tribunal proceedings: unfair dismissal (including redundancy), constructive dismissal, detriment and/or dismissal due to protected disclosures being made (also known as “whistleblowing”), workplace discrimination (in any form), harassment and/or victimization. Obviously, the types of claim that you can bring will very much depend on the particular facts of your matter. When you talk to the solicitor advising you on your agreement of settlement you should put all of the facts of your case to him or her so they can advise you on which potential types of claim you may have.
You will have to rely on your solicitor to advise you of the potential strength of your employment tribunal claims. Your solicitor won’t be able to provide you with exact chances of success in your case but they should be able to let you know whether they think your case will be successful or not, and why. You should try and provide any and all documentary evidence to your legal adviser so that they can properly assess your claim, as well as letting them know who you think could provide relevant, supportive witness evidence (should this be applicable), and provide you with full advice on your agreement of settlement.
Again, this is not an exact science at a pre-action stage (i.e. before you issue any claim in the employment tribunal) but your legal adviser should be able to inform you (on a broad basis) as to how much they think your potential employment tribunal claims are worth so this can be factored into an analysis of whether you’ve been offered a reasonably sufficient amount to settle these claims under the agreement.
Your employer will normally inform you of how much they’re willing to offer to settle your claim – this will generally include the statutory and contractual minimum sums that you are owed (such as notice pay, accrued but untaken holiday, any other contractual entitlement e.g. commission or bonus etc.), as well as an ex-gratia sum to compensate you for the manner in which your employment was terminated. You should, at this point, be able to compare and contrast what you’re being offered by your employer against what you have been informed is the reasonable value of your employment tribunal claims.
How much you’re being paid to enter into a settlement agreement will normally be the most important aspect to a client but it isn’t the only factor. Other important terms in a settlement agreement can include whether the client is deemed to be a “good leaver”, provisions relating to gardening leave and whether there are restrictive covenants contained within the agreement (among other things). You should – as above – provide your legal adviser with a copy of your agreement so they may properly advise you on the entirety of the terms that you’re agreeing to.
The main advantages of a settlement agreement are as follows:
You can normally expect to receive the following financial payments under an agreement of settlement:
One of the most important non-financial terms that can be included in a settlement agreement is an agreed reference with your employer (see our guide on obtain references from employers in settlement agreements).
Some of the more common non-financial terms that can be negotiated with your employer include:
Our settlement agreement solicitors will discuss your circumstances and your needs with you, in order to ascertain what terms are important for you in the settlement negotiations.
What you can expect to receive for your particular settlement agreement payout will almost entirely depend on your circumstances. Generally, however, you tend to have a stronger case if you have:
If you satisfy the criteria detailed above then, in our experience, the average agreement of settlement payment is normally:
If you have evidence to show that you have been discriminated against or are being punished for whistleblowing then you may be able to negotiate more than the average payments detailed above (and, equally, it is less important that you have two years’ continuous employment in such cases).
If none of the above applies then you are probably in a weaker negotiating position. However, you still might be able to achieve a settlement (in our experience it is almost always worth pushing for a settlement payout, as if you don’t ask then you don’t get).
Our specialist settlement agreement solicitors will discuss your circumstances with you and advise you on your potential claims, as well as their value and you can use our settlement agreement calculator to determine what may be an appropriate settlement figure for you.
There are no legal minimum settlement agreement payouts (in terms of an ex-gratia payment). However, if you are offered a settlement agreement (also known as an employment compromise agreement) then the minimum sums that you are normally legally entitled to receive include the notice payment, holiday pay, and any statutory redundancy payment.
There is no such thing as a maximum compensation payout but there are certain maximum awards that you can receive for some types of claim (for example, an unfair dismissal claim has a maximum compensatory award).
Employers are not obligated to use the maximum payments that you could receive for a payment as a ‘ceiling’, although they generally do (in our experience) use these maximum payment amounts as guidelines for determining what sums they should pay when negotiating settlement agreements with their employees.
There are no maximum compensation limits in certain types of claim, such as claims for discrimination or whistleblowing.
Our settlement agreement solicitors can discuss with you the appropriate level of compensation for your case and take you through the settlement agreement process.
You have to pay tax on certain payments under a settlement agreement, such as:
You do not have to pay tax (or National Insurance) on an ex-gratia payment up to a maximum amount of £30,000, although any ex-gratia payment will be subject to tax (but not National Insurance) over £30,000.
Payments made as compensation for injury to feelings are generally also not taxable (if the injury to your feelings relates to a detriment that you suffered prior to your dismissal).
You can find further information on this in our article on ex gratia payments .
There are various factors that you should confider in deciding whether to settle your claim or bring a claim in the Employment Tribunal – these include, among others:
However, if you bring and win a claim in the Employment Tribunal then you will generally receive a greater sum of money as compensation than you will receive under a settlement agreement.
If you are dismissed for the reason of redundancy in a genuine redundancy situation and the redundancy process used has been fair then your employer is only obligated to pay you statutory redundancy pay (should you qualify – see our redundancy article) plus your notice pay and any other accrued payments (e.g. holiday pay, bonus , commission etc.). You are not legally entitled to receive an ex-gratia payment in these circumstances, although it is generally worth trying to negotiate a redundancy settlement payment .
If you are dismissed for the reason of redundancy then you may have a case for unfair dismissal if there is not a genuine redundancy situation and/or the redundancy process used has been unfair.
If your redundancy has been unfair then you may be able to negotiate a financial settlement payment similar to the amounts detailed above. Our specialist settlement agreement solicitors can discuss this with you.
You should follow the following guidelines in negotiation a settlement agreement with your employer:
If you agree a settlement agreement with your employer then your employer will generally pay a contribution towards the cost of you receiving legal advice from one of our settlement agreement solicitors (in most situations this legal fee contribution will be somewhere between £350 plus VAT and £500 plus VAT). If you are a senior employee or your matter is particularly complicated then employers do cover greater sums in respect of legal fees (between £1,000 plus VAT and £3,000 plus VAT is not unheard of), but these will normally need to be negotiated.
If you have suffered a personal injury as a result of misconduct on your employer’s part then you can settle such a claim via a settlement agreement. In employment-related claims the most common type of injuries that employers suffer are psychological injuries (such as anxiety, depression, stress, and similar types of injury).
If you have been the victim of discrimination, harassment or victimisation then you may be able to negotiate a compensation payment for personal injury that you have suffered as a result of the discriminatory conduct of your employer.
If you choose not to sign your settlement agreement (because, for example, you are not able to negotiate agreeable terms with your employer) then this means that you can still potentially pursue your employer in respect of legal rights that you believe your employer has infringed upon. We will advise you on what potential consequences your rejection of the settlement agreement will have – including the potential termination of your contract of employment – and outline some practical next steps for you. However, you should be aware that if you do reject the settlement agreement then your employer will not make a contribution to your fees and you will be responsible for all of the legal fees that we have incurred in advising you.
If you wish to take your dispute to court and make an Employment Tribunal claim (instead of signing a settlement agreement), then you must first notify ACAS of the details of your claim and engage in “Pre-Claim Conciliation”. If your claim doesn’t settle in the conciliation period (a period of up to one month) then ACAS will issue a certificate which certifies that you have engaged in pre-claim conciliation; this allows you to then bring an Employment Tribunal claim , should you wish to do so. However, the new ACAS pre-claim conciliation service may make the limitation dates for your claim more difficult to calculate and you are advised to seek specialist legal advice on this.
Ultimately, it is your decision.
Although our job is to provide you with settlement agreement advice, it’s not for us to tell you whether to sign your settlement agreement or not – you must make this decision. If you instruct us to advise you on the merits of your Employment Tribunal claims and whether the value of the settlement agreement represents a “good deal”, we aim to give you the best possible information to allow you to make an informed choice about your settlement agreement. Our specialist settlement agreement solicitors will then only sign their part of the settlement agreement if you tell us you want to proceed with it.
In order for a settlement agreement to be legally binding, and the settlement terms binding on the parties to the agreement, it must be a valid settlement agreement (as outlined above) and both parties should sign the settlement agreement. The key criteria for a legally binding settlement agreement are as follows:
The short answer is ‘yes’, an offer of an agreement of settlement can be withdrawn if it is not accepted by you (with such acceptance normally requiring that you sign the terms of the settlement agreement offered). However, in our experience it is uncommon for an employer to withdraw the offer of an agreement of settlement and generally it is the case that the employer and the employee are able to reach an agreement on its terms.
If you are unable to settle your potential Employment Tribunal claims with your employer then you have the following options: to drop your case or, alternatively, issue a claim in the Employment Tribunal. If you want to bring a claim in the Employment Tribunal then you generally first have to make a request to ACAS for ‘ACAS Early Conciliation’. Once you have started the ACAS Early Conciliation process a conciliator will approach you to try and help you reach a settlement with your employer, with the aim of avoiding you having to issue an Employment Tribunal claim.
In practice anyone can draft a settlement agreement but, as with most things, you will want someone who has the appropriate expertise and experience to draft your settlement agreement. In most cases an employer will ask their specialist employment lawyers or HR professionals to draft the settlement agreement, and the employee’s legal team will then seek to amend the agreement to protect the employee’s interests
The vast majority of the work that our team undertakes on settlement agreement is for employees, although we do offer employers guidance as well – our view is that in order to provide the best advice on a settlement agreement you need to have a good understanding of how both employees and employers think about and deal with settlement agreements, and you can therefore provide the best advice if you are providing both employer guidance and employee guidance.
Under the law of contract, there are certain defined circumstances whereby a settlement agreement may be invalid and can be set aside. These include (but are not limited to):
In this case, the relevant question is whether a settlement agreement can be set aside due to a fraudulent misrepresentation by one party to another, inducing them to enter into the agreement (i.e. that there was a genuine redundancy situation when, it is contended as a matter of fact, this was not the case).
In Hayward v Zurich Insurance Company plc [2015] EWCA Civ 327 ( our analysis here ) the Court of Appeal held that, while the settlement of an ill-founded claim is nonetheless binding, this is not generally the case if the claim was fraudulent: if, subsequent to the completion of the settlement agreement, it is found that a statement about the claim was in fact fraudulent when the other party had believed it was genuine, this may be sufficient to rescind a settlement agreement. However, fraud does not necessarily ‘unravel all’, even when proved – if the party alleging fraud (“A”) was aware (prior to the settlement agreement being completed) that the representation made by the other party (“B”) may not be true but signs the agreement anyway, this will not be sufficient to unravel the settlement (as A had settled the case “with its eyes wide open”).
Applying the above principles to the current question, the crucial issue in the circumstances is whether the person alleging fraud (“A”) was aware – prior to entering into the settlement agreement – that there may not be a genuine redundancy situation at his employer (“B”). If A had alleged to B that there was not a genuine redundancy situation prior to entering into the settlement agreement, but subsequently entered into the agreement anyway, then it is probable that A would find it difficult to challenge the validity of the settlement agreement on the grounds of fraud: A had entered into the settlement agreement with “his eyes wide open”. However, if A had not alleged dishonesty by B from the outset then he may be able to challenge the settlement agreement on the grounds of fraudulent misrepresentation (depending, of course, on A being able to show on the balance of probabilities that the statement by B to this effect was fraudulent).
The practical outcome of this question is that parties need to take care about alleging fault or dishonesty prior to settling a dispute. Further, they also need to understand the implications of settling: advice from specialist legal advisers on this point will therefore normally be extremely helpful in determining the pro’s and con’s of settling a case.
Restrictive covenants are normally relevant for senior employees or executives as they may have access to confidential information or trade secrets of their (former) employer, such as client lists or sensitive financial documents. Employers include such clauses in contracts of employment or settlement agreements to ensure that former employees do not unfairly compete with them after the termination of their employment.
The first thing that an employee should do if their employment with their employer is terminating is to check whether there are any restrictive covenants contained within their contract of employment. If so, then the covenants will apply unless the employer expressly agrees to waive those covenants in the settlement agreement. If not, then the employee has more scope to argue for the “watering-down” or removal of the restrictive covenants in their settlement agreement.
The fact that a restrictive covenant is in a settlement agreement (or compromise agreement) is likely to dispose the court towards enforcement of the restrictive covenant, even though the covenant will be examined by the court to determine whether the scope of the covenant is reasonable. There are a number of reasons why a restrictive covenant which is contained in a settlement agreement will dispose the court towards enforcement, including:
ACAS is a neutral Government-funded body and is not on anybody’s ‘side’ – the ACAS conciliator will not be able to advise you on your claims but will act as a ‘go-between’ between you and your employer. If you instruct a settlement agreement solicitor, however, your lawyer will seek to ensure that the terms of the agreement of settlement are in your favour as much as is possible.
If you agree a settlement agreement with the help of the ACAS conciliator then ACAS will generally use their own agreement (known as a ‘ACAS COT3 agreement’) to set out the terms of settlement in writing.
Both an ACAS COT3 agreement and a standard agreement of settlement serve the same purpose – they are setting out the terms of settlement reached between the employer and the employee. It is not strictly necessary to instruct a settlement agreement solicitor to assist with advising on your COT3, but it can help to reach a better outcome.
There is an ACAS Code of Practice on Settlement Agreements which sets out guidance on how employers should deal with settlement agreements. This is not legally binding, but can prove helpful in certain circumstances. ACAS also provides a useful draft settlement agreement template .
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