Settlement agreements play a key role in resolving employment disputes swiftly and confidentially. Whether you’re ending a working relationship, navigating redundancy or settling a workplace issue, understanding how these agreements work is essential
What is a Settlement Agreement?
A settlement agreement is a legally binding document that resolves disputes between parties, most often between an employer and employee. It’s commonly used in situations involving the end of employment, such as redundancy, disciplinary action or workplace disputes.
Once signed, the agreement waives an employee’s right to bring certain claims against the employer, typically in exchange for compensation.
If you’ve received a settlement agreement and need fast, independent legal advice, our solicitors can review your document today, often at no cost to you. Contact us for immediate advice.
In employment law, settlement agreements provide a structured and confidential way to part company without the risk of an employment tribunal. They must always include clear terms, a payment offer and independent legal advice to be valid.
What is the Purpose of a Settlement Agreement?
Settlement agreements serve to:
- Prevent future legal disputes
- Protect both parties with agreed terms
- Provide financial or other compensation to the employee
- Ensure a clean break in the employment relationship
This legal tool is voluntary. Both the employer and the employee must agree to the terms before signing.
They can also include additional benefits such as an agreed reference, non-disparagement clauses and confidentiality terms that protect both sides. These elements can make a settlement agreement preferable to drawn-out grievance or tribunal processes.
Employment Settlement Agreements
In the context of employment, settlement agreements are used for a variety of reasons. These might include:
- Ending employment on agreed terms
- Resolving grievances or allegations
- Avoiding employment tribunal claims
They can be offered at any stage of employment, but are most common during redundancy consultations or disciplinary processes.
Employers may also use them in cases of poor performance, workplace conflict or long-term sickness absence. They can be used for situations where both parties wish to reach an amicable resolution without formal proceedings.
Common Clauses in Employment Settlement Agreements
Employment settlement agreements typically include:
- Compensation or severance payment
- Waiver of claims
- Confidentiality clauses
- Non-disparagement clauses
- References and announcements of departure
Each agreement is unique, tailored to the specific circumstances of the employee’s role and exit.
Confidentiality clauses (often called NDAs) are standard in most settlement agreements. These protect both parties but should never prevent reporting of wrongdoing or whistleblowing.
The payment section of an agreement will usually break down which elements are taxable and which are not. Compensation for loss of employment may be paid tax-free up to £30,000, while notice pay and holiday pay are subject to tax and National Insurance.
What is the Settlement Agreement Process?
Here’s a typical outline of how the process unfolds:
- Initial offer: The employer presents the settlement agreement
- Legal advice: The employee must seek independent legal advice
- Negotiation: Terms such as compensation, references and clauses may be discussed
- Signing: Once both parties agree, the document is signed and becomes legally binding
- Implementation: the agreed payments or conditions are fulfilled
This process can move quickly, often within a few days, but employees should never feel rushed. It’s important to review the agreement carefully, understand every clause and consider whether the offer is reasonable.
Why is Legal Advice Essential?
Employees must obtain independent legal advice for the agreement to be valid. The advisor, typically a solicitor, must confirm:
- The employee understands the terms and implications
- The agreement is fair and lawful
- No rights are being signed away unfairly
In most cases, your employer will pay for you to receive this advice; typically between £350 and £750 plus VAT. The solicitor will review the terms, negotiate improvements if needed, and ensure your rights are fully protected.
Independent advice is not just a legal formality; it’s your safeguard. Here at Settlement Agreements, our settlement agreement solicitors can often increase your financial settlement. We can clarify tax implications and negotiate fairer exit terms. Find out more by reading, What Does a Solicitor do With a Settlement Agreement.
Breach of a Settlement Agreement
Once signed, a settlement agreement is legally enforceable. If either party fails to meet their obligations, it could result in a breach of contract.
Examples of Breach
- The employer doesn’t pay the agreed compensation
- The employee breaks the confidentiality terms
- One party makes disparaging remarks despite an agreed-upon clause
In the case of a breach, the affected party may be entitled to legal remedies. This can include pursuing damages or, in some cases, revisiting the claims waived under the agreement.
If you believe your settlement agreement has been breached, you should seek legal advice immediately. Our settlement agreement solicitors can offer settlement agreement guidance or negotiate a resolution without returning to the tribunal.
What Happens After a Settlement Agreement?
After signing:
- Employment typically ends (if applicable)
- Compensation is processed, often within 7 to 28 days
- Any obligations, such as returning to the company property, must be completed
Employees are free to seek new work, and future references should align with what’s stated in the agreement.
Some agreements also include a clause requiring both sides to confirm they will not make negative statements about one another. This helps protect reputations and maintain professional relationships post-employment.
Before moving on, make sure your payment schedule, references and final terms are all confirmed in writing. If you need reassurance, our settlement agreement solicitors can check your agreement before it’s finalised. Book your free review.
Settlement Agreements and Redundancy
When used in redundancy situations, settlement agreements often go hand-in-hand with an enhanced redundancy package. These agreements:
- Speed up the redundancy process
- Offer financial security with additional pay
- Reduce the risk of future claims against the employer
A settlement agreement in redundancy situations also provides employees with certainty. It offers a clear payment schedule, agreed reference and final date of employment. This can make a stressful process smoother and more transparent.
Take the Next Steps with Settlement Agreements
Settlement agreements are a powerful legal tool, particularly in employment law. They offer protection, clarity and a clean break when used correctly. Whether you’re an employer looking to resolve a workplace issue or an employee considering your options, understanding the process is crucial.
Before signing, always check that you’ve received fair compensation, clarity on tax and a properly worded reference. If you’re unsure, our employment solicitors can quickly review your agreement and confirm your best options.Our team can help you negotiate fair terms, understand your rights and ensure a smooth process from start to finish. Contact us today to speak with a specialist in settlement agreements.
