If you are in the process of negotiating the termination of your employment, you may want to utilise a settlement agreement in order to get the best outcome.

There are a number of reasons why you may be discussing the terms and conditions of your departure from work with your employer. Whether you are preparing for retirement, exiting as a director or shareholder, going through redundancy, or experiencing a grievance – a settlement agreement can be a great protection tool to achieve a ‘clean’ break for the employment relationship.

What is a settlement agreement?

This is a legally binding agreement that ends an employment on terms agreed between the employer and the employee. In a settlement agreement, employment will terminate on an agreed date and the employer will usually pay a severance payment. This payment is typically made in return for the employee’s agreement not to pursue any claims at an employment tribunal or court hearing. Payments by employers in settlement agreements can have a tax-free allowance of up to £30,000.[1]

Effective negotiations of settlement agreements can remove the need for you to bring formal proceedings against your employer, so it is imperative that you take independent legal advice to achieve the best outcomes.

Retirement and pensions

If you are approaching retirement and planning your end of employment exit strategy, a settlement agreement could help you to achieve a strong exit on agreed terms. It can allow you to negotiate terms pertaining to your employment such as wages, holiday pay, bonuses as well as company cars, mobiles, laptops, and other benefits such as health insurance and gym membership.

Workplace pensions can form a significant part of an employee’s overall benefit package. It is crucial that this is addressed in the settlement agreement in order to achieve a good outcome for your retirement which is also tax efficient.

Every pension scheme is different, and we would advise that you work with a lawyer and financial planner to best navigate this. Your professional advice team can help you to discuss your options with your pension provider for clarity on their rules for paying in tax-free lump sums.

Directors and shareholders in a business

Leave as an employee

You may be a director or senior executive with shares in a business looking to leave employment. If your intention is to stop being an employee but stay on as a director and shareholder, the correct way to formalise that would be in a settlement agreement with your employer. Thought will need to be given as to any future employment plans and how these could impact or conflict with duties as a director or shareholder. Negotiating these terms can be complex – having specialist legal advice can help you to navigate this process and achieve the desired results.

Resign as a director

If you have decided you will no longer be an employee and also plan to resign as a director, the settlement agreement will need to specify this. It is particularly important to set out the process and timings of your resignation to ensure you are working in accordance with your company’s Articles of Association. This a document that specifies the regulations for a company’s operations, and there could be a specific method of resignation required with a minimum notice period. Understanding and negotiating the terms of your service contract and shareholder agreement are key. Again, this is where a legal professional can support you.

Giving up shares

If you are a shareholder planning to give up your shares, your shareholder agreement will need to be reviewed as this is likely to impact your exit deal. Depending on the shareholders agreement and/or the Articles of Association, the company may need to obtain investor consent before any promises can be made to you. This will be critical to the settlement agreement negotiations, and it is strongly advisable for lawyers to be involved as early as possible in this process. When directors and shareholders are involved, settlement agreements often become complex with technical negotiations so professional legal counsel is key.

Redundancy and restructuring

You may be faced with the prospect of compulsory or voluntary redundancy, and both instances can benefit from having a settlement agreement in place. Many employers will offer a settlement agreement with an enhanced redundancy payment to facilitate a smoother exit and to protect themselves from any future tribunal claims.

In any redundancy process, settlement agreements can help to minimise the uncertainty involved by clearly outlining how much you will be paid and how much notice you will receive. By signing a settlement agreement, you will be waiving your legal right to bring claims against your employer. This may create scope to negotiate a more lucrative exit package compared to a standard redundancy pay out. You can also request your employer provide you with an employment reference, so you have peace of mind knowing this is secured for any future employment.

Grievance and disputes

If you have been treated poorly in the workplace or you are unhappy with the outcome of a grievance, you may want to consider a settlement agreement before exiting the business. With a settlement agreement you can be certain of the outcomes agreed upon, rather than facing the unknown of a court case or employment tribunal.

In summary

It is strongly advised that you seek professional legal advice as early as possible when you are planning your employment exit strategy. An experienced corporate lawyer will be able to advise you on your specific circumstances and support you in negotiating a settlement agreement that suits your specific goals.

If you would like to arrange a complimentary consultation with our team about your settlement agreement, please do get in touch.

Settlement Agreements - Arrange a consultation

[1] Tax on termination payments, gov.uk 2023
This article is distributed for educational purposes only and should not be considered legal advice. If you are unsure about the suitability of otherwise of any product or service, we recommend that you seek professional advice.
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Tax treatment depends on individual circumstances and is based on current UK legislation, that is subject to change at any time.
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Zee Hussain

Director, Corporate Law

Zee is an experienced and trusted solicitor providing commercially focused advice to businesses, directors and senior executives, throughout the UK, on all aspects of employment law.

Learn more about Zee Hussain