Settlement Agreements

Settlement Agreements FAQS

Below, we have answered some frequently asked questions concerning settlement agreements

• What is a settlement agreement?

  A settlement agreement provides an employee with compensation after they have been dismissed, and in return, they agree not to take any legal action against their former employer.

  In other circumstances, a settlement agreement could be agreed upon between an employee and employer where the employee is still employed by the company but both parties want to settle a dispute that has arisen.

• What does a settlement agreement generally cover?

  A settlement agreement will usually cover issues, such as settling all current and future legal claims and payment of any money owed to the employee. Such claims are likely to include:

  • Unfair dismissal;
  • Discrimination;
  • Breach of contract;
  • Unpaid wages;
  • Claims for notice pay; and
  • Claims relating to Transfer of Undertakings (Protection of Employment) Regulations (TUPE).

  A settlement agreement that satisfies the needs of both the employee and employer can be in the interests of both parties, as it provides the employer with the comfort that they will not face any claim and the employee with a financial settlement that should help them to move on with their life and career.

  A settlement agreement is a legally binding contract and requires a person to obtain specialist legal advice on its terms and effects of it before signing.

• At what point does a settlement agreement become binding?

  To be legally binding, a settlement agreement must:

  • Be in writing;
  • Relate to the employee’s particular complaint or legal proceedings;
  • Record that the statutory conditions for a settlement agreement have been met; and
  • Confirm that the employee has had legal advice from an independent adviser and identify the independent adviser.

• What are the benefits of agreeing to a settlement agreement?

  A settlement agreement can offer benefits to both employers and employees. For employees, potential benefits include:

  • Compensation (which may be tax-free up to £30,000);
  • Peace of mind and avoidance of stress, uncertainty and delay; and
  • Reputational protection.

• What is a ‘protected conversation’?

  Where there is no existing dispute, an employer (or employee) can make an offer in the form of a ‘protected conversation’ to end the employment relationship on agreed terms, on a confidential basis, and that offer cannot then be used as evidence in an ordinary unfair dismissal claim to an Employment Tribunal.

• What is a ‘without prejudice’ conversation?

  Where there is a dispute (e.g. where legal proceedings are contemplated or have begun), a ‘without prejudice’ conversation can take place. Things said by one party to another in a ‘without prejudice’ conversation cannot be used as evidence in future legal proceedings (i.e. they are effectively ‘off the record’) as long as they are said for the purpose of a genuine attempt to reach a compromise or settle a dispute.

• Are payments as a result of a settlement agreement tax free?

  Certain non-contractual termination/compensation payments in settlement agreements can be paid tax-free (and without deductions of National Insurance contributions) up to a threshold of £30,000. However, the £30,000 exemption does not apply to all payments in settlement agreements and the tax implications of any payment should be considered carefully.

• Do I have to accept a settlement agreement offer?

  No, if you are not happy with the terms that your employer/former employer has offered to you, then you do not have to sign the settlement agreement.

  You may feel that you have been given an unreasonable ultimatum by your employer/former employer or are being pressured in to signing the settlement agreement. The way that your employer/former employer conducts itself in the way it presents the offer and options available to you should not result in you being subjected to undue pressure or improper behaviour.

  If negotiations are unsuccessful and you decide not to sign the settlement agreement, you may have grounds to bring a claim against your employer/former employer in an Employment Tribunal. It is important to remember that there are strict time limits for bringing Employment Tribunal claims (generally, three months less one day from the date of termination/act of discrimination).

• Is there a time limit in which I need to accept the settlement agreement on offer by?

  There is no strict legal time limit, but Acas guidance says that employers ought to give their employees a minimum of 10 days in which to decide whether or not they wish to accept a settlement agreement on offer. Your employer/former employer should not pressure you into signing the settlement agreement, or ask that you agree to it immediately.

• Can restrictive covenants be included in a settlement agreement?

  Yes. Restrictive covenants are designed to protect an employer’s business interests when an employee leaves. A restrictive covenant or post-termination restriction could prevent you from:

  • Competing with your former employer for a certain period of time;
  • Approaching or dealing with your former employer’s customers for a certain period of time; or
  • Poaching other members of staff to join you at a rival enterprise.

  However, for a restrictive covenant to be legally enforceable, it meet certain tests. Broadly speaking, it will need to be no more restrictive than necessary to protect your former employer’s legitimate interests.

• Do I need a solicitor to advise me on a settlement agreement?

  In order for a settlement agreement to be legally binding on both parties, you must obtain independent legal advice on the contents. At Nelsons, we will:

  • Ensure that you understand what you are signing;
  • Check that the document is appropriate in conjunction with your instructions; and
  • Where requested, work with you to secure the best possible outcome.

  It is important that you understand the legal effects of the settlement agreement and the impact on your employment and finances, as once you have signed it you cannot change your mind.

• Who pays for the legal advice that I need to take on my settlement agreement?

  Your employer is likely to offer to contribute towards some or all of your fees in obtaining legal advice on the document. They usually offer a fixed sum, which will often be sufficient to cover advice on a straightforward settlement agreement, where you are happy with the terms of the offer.

  Where you require our assistance in improving the terms of the settlement agreement, or if the matter becomes contentious to the point where it looks like your fees will exceed the contribution on offer, we will seek to negotiate this figure up. If we consider it likely that there will be a balance payable by you we will discuss this with you in advance.

• Do I need a face to face appointment to complete the paperwork for a settlement agreement?

  We regularly advise clients on a range of issues remotely and assisting with settlement agreements is no different.

  As long as you are able to provide us with the necessary paperwork we require and have access to a telephone and email, we can advise you on the terms and effect of the settlement agreement without the need for a face to face appointment.