Settlement Agreements

A Settlement Agreement is a legally binding agreement in which the employee agrees to settle statutory and contractual claims, usually in exchange for a settlement payment. Settlement Agreements are commonly used when an employer offers an employee an enhanced termination or redundancy payment, or to settle a potential dispute.

What are the requirements for a binding settlement agreement?

It must contain certain information required by statute and the employee must have independent legal advice, usually from a solicitor. The claims that are settled need to be identified in the settlement agreement.

What are the usual terms of a settlement agreement?

Each agreement should be tailored to the particular employee. Generally speaking most agreements will contain clauses dealing with the following:

  • Waiver / Settlement;
  • Claims not to be settled (if any);
  • Payments due up to Termination Date;
  • Termination Date;
  • Payments;
  • Confidentiality;
  • Non-derogatory comments;
  • Return of Company Property;
  • Tax and Tax indemnity;
  • Warranties Clause;
  • Legal Advice and Certificate of Advice;
  • References to be given.

Other clauses will normally cover third parties (who can enforce), jurisdiction (where disputes on the agreement will be dealt with), entire agreement (that the settlement agreement is the entire agreement and supersedes all prior discussions and agreements).

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Tax on Payments under a Settlement Agreement

This is a complex area and one recently subject to proposed changes by the Government.

Currently, the first £30,000 of a termination payment is capable of being paid tax free. But this does not include payments in lieu of notice or wages, including bonuses, holiday pay, commission or outstanding pay.

Payments over £30,000 are taxable at the employee’s marginal rate; an employer is required to deduct tax prior to payment.

Payments in relation to an employees legal costs of taking advice on termination and settlement are also capable of being paid without tax liability.

Payments in relation to personal injury and injury to feelings are potentially capable of being paid without incurring tax liabilities, depending on the circumstances. Case law and tax legislation restrict the situations in which payments mean some payments will be taxable. Advice should be sought in a case by case basis.

Question:  A manager has offered an employee a severance deal in an email which has been accepted. The employee is now refusing to sign a settlement agreement and is claiming the emails set out the deal. Any advice? Bryn...

Important: This article is for information purposes only and its contents do not amount to legal advice. If you need legal advice on a settlement agreement or another particular matter please consult an employment solicitor without delay.


ACAS Code of Practice

April 2018 tax changes – Termination Payments & post-employment notice pay (PENP)

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