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Settlement agreements FAQs

What are the requirements of a settlement agreement?

There are a number of specific legal requirements that must be met in order for a settlement agreement to be valid. It must be in writing; relate to a particular complaint; identify the independent legal adviser; state that the independent adviser has given the employee advice and is covered by a contract of insurance; and state that the statutory provisions governing settlement agreements have been met.

Why are settlement agreements used?

When an employment has come to an end, either because of redundancy or a disagreement, a settlement agreement is used to agree the terms under which the employee will leave their job. Usually, the agreement involves the employee receiving financial compensation in return for agreeing not to take the employer to court.

What are the benefits of settlement agreements?

From an employee’s perspective, it gives you the comfort of knowing that the matter is settled, and that your employer is legally obliged to pay you the settlement sum being offered. From an employer’s viewpoint, it gives them the comfort of knowing that their employee will not take any further legal action (whether potential or otherwise) in relation to any dispute.

Should I take my case to tribunal, or accept a settlement agreement?

Terms negotiated through settlement agreements can often represent a better deal than what can be achieved through fighting the case at tribunal, not just because of certainty over the financial package, but also by securing terms which a tribunal can’t award, such as a reference wording or handover arrangements. Effective negotiation of settlement agreements can remove the need for you to bring formal proceedings against your employer, which can be a time-consuming and costly route to take.

What is the difference between a settlement agreement and a compromise agreement?

There is no difference – they’re the same thing. The government renamed compromise agreements to settlement agreements at the end of July 2013. Sometimes people still use the old name.

What happens when I sign a settlement agreement?

By signing a settlement agreement, you are effectively giving up the chance to make a claim against your employer, usually in exchange for a settlement payment.

Do I have to take legal advice?

As an employee, you must take independent legal advice on the terms and effect of your settlement agreement before it will be considered legally binding.

Do I have to pay the legal fees?

In most cases, the employer will agree in the settlement agreement to contribute an amount towards your legal fees arising from having to obtain legal advice on the meaning and effect of the settlement agreement. This costs contribution is usually sufficient for us provide the required legal advice, meaning that you as the employee won’t have to pay anything towards our fees, assuming you are happy with the settlement amount being offered.

How are the legal fees paid?

We invoice the employer directly for payment. If the employer’s contribution towards our fees (see above) is insufficient, we will advise you, the client, at the outset and make necessary arrangements. Sometimes we can agree an increase with the employer.

Do I have to pay tax on the money I receive?

Generally speaking, any sums owed to you under your contract of employment, such as wages, holiday pay and bonus will be subject to tax in the normal way. Any redundancy payment, compensation for loss of employment or injury to feelings, or amount that can be treated as damages can be paid tax exempt up to £30,000.

When does the settlement agreement take effect?

The agreement only takes effect when you (the employee) have taken independent legal advice, signed the agreement, and we have issued a certificate to confirm the advice taken and returned this to the employer.

When will I be paid the settlement sum due under the settlement agreement?

Normally you’ll be paid the settlement sum once the settlement agreement has taken effect (as above).

Do I have to sign a settlement agreement if my employer asks me to?

No. Settlement agreements are completely voluntary and their terms must be agreed by both parties. Neither the employee nor the employer can be forced to enter into one of these agreements if they don’t wish to do so.