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).

Settlement Agreements – is there another way?

Settlement Agreements are a useful tool for dealing quickly with poor performing or troublesome employees, says Catherine Greig, Director of Greig Employment Law. But there...

Who can settle a Settlement Agreement?

A settlement agreement is a legally binding document. So who can sign it off? Emmajane Taylor-Moran, Partner and Head of Employment Law at Gelbergs takes...

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.

From the Presidents Club to Harvey Weinstein, confidentiality provisions have hit the headlines this year. And the Women and Equalities House of Commons Select Committee recently heard evidence from lawyers on the subject. Gareth Brahams, Managing Partner at Brahams Dutt...

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.

Resources

ACAS Code of Practice

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

Can we use a settlement agreement in an individual redundancy situation?

Q: Can we use a settlement agreement in an individual redundancy situation? Naomi Greenwood, a Partner specialising in employment law at Moore Blatch LLP answers. You...

Can a settlement agreement resolve a disciplinary situation?

Q: We’ve got a disciplinary situation with one of our employees. Can we use a settlement agreement to resolve it and if so, how...

Does an email about a severance offer constitute a binding contract?

Question:  A manager has offered an employee a severance deal in an email which has been accepted. The employee is now refusing to sign...

Are separate copies of documents OK in settlement agreements?

Q: HR Manager question: is it OK if an employee signs a Settlement Agreement at work and his adviser separately emails a copy of...

Settlement agreements for Senior Executives (five things HRs should prepare for)

Settlement agreements are a useful tool to end cleanly the employment of an unwanted senior executive or member of staff, says Jacqueline Kendal, Senior Associate...

More Settlement Agreement Articles

What does ‘without prejudice and subject to contract’ mean in a...

Without Prejudice and Subject to Contract The terms Without Prejudice and Subject to Contract have different meanings but you will often see them used together...

After the settlement agreement, he badmouthed us on Facebook

Question: An employee signed a settlement agreement promising not to say anything derogatory about the business or its directors.  A director has discovered the...

What are the risks of failing to pay a settlement agreement...

Q: Late payments: What are the risks to an employer of failing to pay a settlement agreement payment on time? Emma Gray, Managing Associate Solicitor at...

Can we settle a personal injury claim with a settlement agreement?

Q: An employee has had an accident at work. The employee is leaving due to redundancy under a settlement agreement. Can we settle the...

Five things you should know before you make a settlement agreement...

About to make a settlement agreement offer? Read this first. From who's going to lead the discussion to what the terms should be, Janette...