Quick guide to settlement agreements for employees

22 November 2021

Quick guide to settlement agreements for employees


My employer wants me to enter a settlement agreement, what should I expect?

If you’ve just been given a settlement agreement or you think you might get one shortly, then don’t hesitate to call our HR and Employment Law team on 01284 767766 for a chat and some guidance. You may also find the following a useful reference for what you should expect to see in a settlement agreement.

Many employers use settlement agreements (they used to be known as compromise agreements) to settle a dispute with their employee or wrap up the legal aspects of ending their employment.  This could be because the employer wants to dismiss the employee without following a fair process, because they want to be sure that they’re not going to end up in a court or employment tribunal if they go ahead with the dismissal, or just because they want to offer the employee some extra money and they want something back in exchange. 

Using a settlement agreement will allow you and your employer to come to an agreement about how and when your employment will end, what you will get and any other arrangements you agree to. 

All settlement agreements are different, but here are a few things you’ll usually come across in a settlement agreement:

Your reason for leaving

The settlement agreement will often say why you’re leaving. This could be ‘redundancy’ or even that it is by ‘mutual agreement’.  Remember, this is the reason you’ll be giving as your reason for leaving, so make sure it’s in line with how you want to portray your departure.

When you leave and what will happen if this is not immediate

Your employer may decide that they want you to leave immediately and pay you in lieu of giving you your notice.  Or they may want you to work out your notice and pay you as normal throughout your notice period. 

If your employer pays you in lieu, then your employment will end immediately.  If they decide to give you your normal amount of notice, then your employment will end at the end of your notice period.  During your notice period you may be asked to go into work as normal.  Or, you could be put on garden leave, which is where you are asked to stay away from work during your notice period. If you’re on garden leave you must still be available for work and you’re still bound by the same obligations as you would be if you were still at work.

How much you will get paid

Your employer will need to pay you what you’re owed under your contract.  This will usually include your notice pay, outstanding holiday pay and any bonus and commission payments that you’re due.  These should be set out separately in the agreement as they’ll need to have income tax and employee National Insurance Contributions deducted from them. 

In addition, your employer may offer to make a lump sum payment to you as a ‘sweetener’ to encourage you to accept their offer.  This is often known as an ex-gratia payment.  How much they offer is you is up to them and down to negotiation.  It largely depends on the financial circumstances of your employer and the reasons for you leaving. For example, if they’re offering you a settlement agreement instead of disciplining you, the lump sum payment may be quite small or non-existent.  The fact that you’re leaving with a clean record and your notice pay may be enough of an incentive for you to accept the agreement.  But if, for example, your employer is asking you to leave just because your employer doesn’t think you’re right for them, then they will generally need to offer you more for you to accept the settlement agreement.

Tax and a tax indemnity

Your employer will need to deduct Income Tax and employee National Insurance Contributions from all payments that you’re contractually entitled to, such as notice pay and holiday pay. However, you can receive the first £30,000 of any additional payment without any deductions. 

Although your employer will pay the tax-free element of any lump sum payment to you without making any deductions from it, they’ll usually want to include a tax indemnity clause in the settlement agreement.  This will allow them to recover any tax from you in the unlikely event of HMRC deciding that the tax-free payment (or part of it) should have been taxed.

Return of company property

You may have some company property that you need to return, such as a laptop or a security pass.  Your employer will most likely include a clause in the settlement agreement to ensure that you return these items.  They can either do this by using a generic ‘return all company property’ clause or they can set out exactly what they want you to return.  In some cases, you may be able to agree with your employer that you keep certain company property, such as an older company car, a laptop or a mobile phone.  In this case you’ll need to make sure that the arrangement is set out clearly in the settlement agreement.  You should also be aware that you may need to pay tax on the items you’re given.

Mutual non-derogatory clauses

Your employer will normally want to include a clause in the settlement agreement to stop you from making any negative or disparaging comments about them.  You should try to make sure that the clause is mutual.  This will mean that your employer will need to try their best to ensure that none of their employees bad-mouth you.  In some cases, there will be certain individuals who you may want to gag, so they can be specifically named in your settlement agreement alongside any more generic clause.

Job reference

There isn’t any obligation for your employer to provide you with a job reference, so you should ask for them to do this in the settlement agreement.  Ideally, you’ll want to include a copy of the agreed reference in the settlement agreement.  You should also push for a clause saying that any oral reference given must be in no less favourable terms.  Any reference that’s agreed is likely to be a standard objective reference setting out your start date, your end date and what you did in between.  Your employer may offer a more detailed reference than that, but nowadays that’s the exception rather than the rule.

Time limits for payment

The settlement agreement should set out when the payments to you will be made. There’s no set time for this, but the payments are usually made within 14, 21 or 28 days of the later of your termination date or the settlement agreement being completed.

Post-termination restrictions

Your employer may want to introduce new post-termination restrictions as part of the settlement agreement or seek to vary existing ones that you already have. These restrictions will usually stop you from poaching clients, key employees and work from your employer.  If the restrictions already exist, then there’s not much you can do.  But if they’re new ones then you can push back and either not agree to them or try asking your employer to pay extra for you to agree to them.

Breach of settlement agreement

There’s likely to be a clause in the settlement agreement which states you must return some or all of the payments made to you if you breach the agreement.  This is to be expected but, you should look to restrict this clause to just the additional payment that you’re receiving and not all the payments. You are, after all, contractually entitled to notice pay, holiday pay and redundancy pay anyway, so why should you have to give these back.  You’ll also want to make sure this clause only kicks in if you breach the settlement agreement in a major way; what’s known as a substantial breach.

Bonuses, commissions and LTIPs

Most bonus and commission schemes and Long-term Incentive Plans (LTIPs) will have detailed rules about what will happen if you leave.  You can try to negotiate a different outcome and see whether you can still get some additional benefit from the scheme even if you wouldn’t ordinarily be entitled to it.  With LTIPs in particular you’ll want to try to leave as a “good leaver” and ensure that you retain your rights even after your employment ends.

Legal fees

Your employer doesn’t have to contribute towards your legal fees if they don’t want to.  But they’ll almost certainly offer to do so. 

Most employers offer to contribute between £350 to £1,000 plus VAT towards your legal costs.  This contribution will normally be enough in simple cases.  But in more complicated cases it may not be.  You can always try to negotiate an increase (or we can on your behalf).

Waiver of claims

One of the main things you’ll agree to do in the settlement agreement is to give up any rights you may have against your employer.  Your employer will normally want you to waive all your rights against them other than your rights to enforce the settlement agreement, in respect of accrued pension rights and in respect of personal injuries that you could not know about, as you can’t waive these rights.

Confidentiality clause

Most settlement agreements include a clause stating that you must keep confidential both the existence of the settlement agreement and its terms. It’s also quite common for the clause to set out who you can tell about the agreement.  This list often includes those providing professional advice to you (lawyer, accountant, recruiter etc), your close family and where you’re required to disclose the details by law.

A new job offer

A lot of settlement agreements include a clause saying that you mustn’t have already been offered an alternative position. You should look to get this clause deleted if you’re in negotiations about a new job.

Full and final settlement and negotiation

Please remember that this is ‘it’.  The settlement agreement will usually be in full and final settlement of any claim you can make against your employer, so there’s no going back for more once it’s completed. So, you should make sure the arrangements you come to reflect what you want (as far as you can).

Whether you’re looking for advice regarding an employment dispute or looking to better understand your rights in a possible upcoming situation, contact our team today. Our experienced Employment Law team provide advice to employees on all matters of Employment Law across Suffolk, Norfolk, Cambridgeshire, Essex and London. Get in touch today on 01284 767766.

Please note this article is provided for general information purposes only to clients and friends of Atkins Dellow LLP. It is not intended to impart legal advice on any matter. Specialist advice should be taken in relation to specific circumstances. Whilst we endeavour to ensure that the information in this article is correct, no warranty, express or implied, is given as to its accuracy, and Atkins Dellow LLP does not accept any liability for error or omission.

© Atkins Dellow LLP 2021

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