In order for an employment settlement agreement to be valid and enforceable it must must satisfy certain conditions (which are set out in s.203(3) of the Employment Rights Act 1996).

The legal requirements of a settlement agreement are as follows:

1. The settlement agreement must be in writing;
2. The agreement must relate to a “particular complaint” or “particular proceedings” (i.e. to defined claims that you are settling under the settlement agreement);
3. You must have received legal advice from a relevant independent adviser (such as a specialist settlement agreement solicitor) on the terms and effect of the proposed agreement and its effect on your ability to pursue any rights before an Employment Tribunal;
4. The legal adviser that you instruct must have a current contract of insurance, or professional indemnity insurance, covering the risk of a claim by you against your legal adviser in respect of legal advice given;
5. The settlement agreement must identify the adviser; and
6. The settlement agreement must stated that the conditions regulating compromise agreement/settlement agreements have been satisfied

If your agreement does not meet the above criteria then it will not settle your statutory claims – this would mean that you would technically be able to pursue your (former) employer for your statutory rights. However, the practical effect of doing so will probably be that you will have to pay back some or all of the payments made to you under the settlement agreement).

You may wish to seek a settlement agreement in a variety of circumstances, generally either when you want to leave your employment because you are unhappy, because your employer wants to terminate your employment, or where you have already left your employment and want to settle various claims you may have against your employer.

The following types of situations are circumstances which could lead to a settlement agreement:

• If your employer has failed to pay you wages that you are due
• If your employer has breached your contract of employment in some way (e.g. by failing to pay you a bonus or commission that you believe that you are due)
• If you have been discriminated against at your job or harassed
• If you have been victimised by your employer because you have raised a complaint
• If your employer thinks that you are underperforming
• If your employer thinks that you may have engaged in misconduct

Senior employees in organisations (such as executives or directors) may find that a restructure, merger or a change in strategy may lead to a situation where their continued employment is difficult. A natural solution to such an issue is for the senior employee and the employer to agree mutual termination terms, which can be arranged via an employment settlement agreement.

The main advantages of an employment settlement agreement are as follows:

• You can use them to obtain a financial sum to compensate you for poor treatment that you have experienced at work (for example, if you have been discriminated against or have had your contract breached) without both sides having to go to the cost, stress, time and uncertainty of an Employment Tribunal claim
• Settlement agreements are quite tax-efficient, in that you can receive the first £30,000 of the settlement amount tax-free
• You can negotiate into the settlement agreement non-financial terms that are important to you (such as, for example, a reference that you are happy with, an internal or external announcement, or appropriate confidentiality clauses)
• You can use a settlement agreement to negotiate a higher sum upon termination of your employment than you may have otherwise been entitled to receive (i.e. beyond your notice pay, holiday pay, and statutory redundancy pay (if applicable))
• To allow unhappy employees an exit from potentially stressful and unpleasant situations without having to resort to litigation

The main disadvantages of a settlement agreement are as follows:

• Your employer may not be willing to pay you what you think your claims are worth under the settlement agreement –  in this case, you will need to decide to accept (what you consider to be) an undervalue or to reject the settlement agreement
• You may not be happy with the broad confidentiality clauses that tend to be used in settlement agreements

The financial settlement you receive depends on many factors, including your job, your age, your seniority, the industry you are employed in, and what claims you might have as a result of your dispute with your employer.

Our experienced settlement agreement solicitors are expert negotiators and can advise you on what they think your claims are worth. They are also skilled at persuading employers to enter into settlement agreements where the employer may not otherwise with to.

Our settlement calculator provides general guidance as to what compensation you may be entitled to.

You can normally expect to receive the following financial payments under a settlement agreement:

• Contractual payments payable to the date of termination;
• Payment in lieu of notice (if you are not serving your notice period or being put on garden leave);
• Holiday pay accrued but not taken as of the termination date;
• Statutory redundancy pay (in a redundancy situation);
• Compensation for termination of employment (also known as an ‘ex-gratia payment’ or termination payment);
• Sums due in respect of bonus payments, share schemes, and/or long-term incentive plans (also known as ‘LTIPs’);
• Additional payments for post-termination restrictions and/or new confidentiality clauses

The following non-financial terms are common in a settlement agreement:

• That you be provided with a reference by your employer after you leave your employment, as well as the form of the reference
• Confidentiality terms, ensuring that you and your employer keep the terms of the agreement secret (subject to certain exceptions) after the agreement is completed (it is common to need to amend the confidentiality clause to make sure that it applies to both parties)
• ‘No bad-mouthing’ clauses (more technically known as ‘non-derogatory clauses’) which prevent both you and your employer from saying anything negative about each other after (again, this is normally something that will need to be amended in the agreement)
• Outplacement support – that your employer will pay for a third-party company to help you improve your CV and find a new job
• That you’re able to keep company property in your possession – you can, in our experience, negotiate with your employer to keep the company mobile telephone or laptop in your possession, or to retain the mobile telephone number in your possession
• Allow you to keep receiving certain work-related benefits – for example, extending the period of time that you are covered by medical insurance for or that your employer pays a certain sum into your pension to top up employers’ pension contributions

If you have been offered a settlement agreement by your employer then you should do the following:

1. Check, in writing, the exact terms of what you’re being offered by your employer – make sure that you and your employer are on the same page about what you’re being offered;
2. Obtain a copy of the settlement agreement from your employer;
3. Thoroughly check the settlement agreement to ensure that the terms that the offer your employer has made you is drafted into the settlement agreement;
4. Speak to a specialist employment solicitor to discuss your situation and next steps;
5. Consider whether you want to negotiate the agreement or to just proceed to complete it

The short answer is that you will need to pay tax on some of the payments made under a settlement agreement but you will not need to pay tax on certain sums.

You will normally need to pay tax on the following sums:

• Your notice pay (whether you’re being paid in lieu for your notice pay, you work your notice out, or you’re placed on garden leave);
• Holiday pay;
• Bonus payments; and
• Any other payments that you’re contractually owed by your employer

You will not normally have to pay tax (or National Insurance contributions) on payments made as compensation for the termination of your employment (also known as ‘ex-gratia payments’) up to a total sum of £30,000. Any compensation paid over £30,000 will normally be subject to tax (but not National Insurance).

Payments made as compensation for injury to feelings are generally also not taxable (if the injury to your feelings relates to a detriment that you suffered prior to your dismissal).

Equally, payments made on account of a disability are also normally free of tax and national insurance.

If, at the time you are negotiating your settlement agreement, you are entitled to commission or bonus payments then your entitlement to those bonus and/or commission payments should be recorded in the settlement agreement – a failure to record your entitlement to those payments in the agreed settlement agreement would generally mean that you are no longer entitled to receive those commission and/or bonus payments, as there will be an “entire agreement” clause in the settlement agreement (an entire agreement clause means that only the terms of the settlement agreement can be relied on by the parties once the settlement agreement is completed (as well as any other documents referred to in the entire agreement clause)).

You should always be very clear with your employer – both in negotiations and in the settlement agreement itself – what payments you are entitled to, and how much you are entitled to in respect of each category of payment (i.e. how much in respect of bonus, how much in respect of commission, how much in respect of notice pay etc.)

You are, upon termination of your employment, generally entitled to receive notice pay – the terms of any settlement agreement with your employer should therefore set out how your notice pay entitlement is being dealt with under the settlement agreement.

Your entitlement to notice pay should not, generally, affect your entitlement to other payments under the settlement agreement. Your notice period is a starting point in the negotiations and we will generally look to negotiate a number of months’ extra salary on top (how much will depend on a number of factors, including your seniority, the strength of your potential claims, your employer’s financial resources etc.)

As a general rule, the higher your annual salary is the more money you can expect to receive in settlement agreement negotiations. This rule is, of course, dependent on a number of factors including:

• The overall strength of your claims (i.e. how likely you are to win)
• The types of claims that you are bringing
• The potential value of your claims in the Employment Tribunal
• How complex your claims are likely to be in the Employment Tribunal (as, generally, the more complex the claim, the more that the employer will be looking at spending on defending the Employment Tribunal litigation)
• The employer’s financial resources (‘richer’ employers are generally going to be able to afford to pay larger settlement sums)

If you are disabled then the value of your claim may be greater (than if you were not disabled) because:

• It may be more difficult for you to find ‘conducive’ new employment, and this would therefore mean that the value of any compensation paid to you would have to be larger (in order to compensate you for the extra time out of work);
• If you are disabled then you may be able to assert a disability discrimination claim, which may mean that the overall value of your potential Employment Tribunal claim is higher;
• You may be able to claim a greater proportion of the sum that you are paid as a tax-free payment

You may be able to bring a claim of discrimination in the Employment Tribunal if you have, broadly, been subjected to unfavourable treatment because of a protected characteristic that you possess, or somebody else possesses – the protected characteristics are: age, sex, race, religious or philosophical belief, disability, sexual orientation, gender reassignment, marriage and civil partnership, and pregnancy & maternity.

If you have a potential discrimination case against your employer then it might improve the value of your potential Employment Tribunal claim (and therefore what you are able to seek in settlement for the claim) – you may be able to argue that you suffered an injury to your feelings, for example, or that your employer should pay a sum in respect of aggravated damages to you. However, discrimination claims can be difficult to prove and, further, employers quite often vigorously fight them: no-one wants to be publicly accused of discrimination, particularly when it may seriously damage your business’ reputation.

Our experienced employment solicitors will help you to assert your potential discrimination claim and seek to improve the value of your settlement agreement.

Your age might affect the value of your settlement package.

If you are relatively young and inexperienced, your award may be less, as:

1. You may face fewer challenges in finding another job; and
2. You may have a lower salary and benefits package, which might reduce the overall potential value of your claim

However, if you are nearing retirement age and your role is highly specialised, the fact you are likely to have trouble finding new employment might be a favourable factor in the settlement agreement negotiations (particularly if you have a large salary and/or your employer makes relatively large pension contributions on your behalf).

The size of your employer (in terms of the number of employees, financial resources etc.) will, generally, have an impact on the amount of money that you are able to negotiate with your employer under a settlement agreement – this is because, as a general rule, larger employers with greater financial resources will generally have the resources to pay out larger settlement sums to departing employees; they will certainly have greater resources than smaller businesses, which may not be able to afford large payouts to employees to settle claims.

However, on the other hand, larger employers have the resources to engage expensive legal teams to defend your claim, so this may make it more difficult to succeed with the Employment Tribunal claims that you are asserting.

Our expert employment solicitors can help you navigate your settlement, and can advise you on how to best approach your situation (regardless of the size of your employer or how expensive their legal team is).

The longer you have worked for your employer the more likely, as a general rule, you will be able to negotiate a higher value of settlement payment. This is for the following reasons:

• You will undoubtedly have more ‘political capital’ the longer you have worked for your employer: you may have direct access to the people who are authorising the negotiations and are therefore may be able to directly plead your case to them
• You may have valuable skills and you may know where the ‘bodies are buried’ with your employer (i.e. you may know things that your employer would not want to be disclosed, which may mean that your employer will be keen to tie you to a confidentiality clause and therefore increase your leverage in the settlement negotiations)

If you are offered a settlement agreement then you are entitled, at minimum, to be offered the following payments:

• Notice pay;
• Holiday pay (accrued but not taken to the termination date);
• Statutory redundancy pay (if it is a redundancy situation and you are entitled to statutory redundancy pay)

There is no legal minimum, however, in respect of what ex-gratia payments you are entitled to. Our experienced settlement agreement solicitors will seek the maximum ex gratia settlement payout that they can when negotiating your agreement, and will advise you on what they think is achievable.

There is no such thing as a “maximum” compensation payout ,but there are certain maximum awards that you can receive for some types of claim (for example, an unfair dismissal claim has a maximum compensatory award).

Employers are not obligated to use the maximum payments that you could receive for a payment as a ‘ceiling’, although they generally do (in our experience) use these maximum payment amounts as guidelines for determining what sums they should pay when negotiating settlement agreements with their employees.

There are no maximum compensation limits in certain types of claim, such as claims for discrimination or whistleblowing.

Our settlement agreement solicitors can discuss with you the appropriate level of compensation for your case.

If you’ve already left your job then that doesn’t rule you out from being able to negotiate a settlement agreement: your employer may be disposed to offer you a settlement agreement or, alternatively, you could have good legal grounds to push for a settlement agreement.

If you’ve already left your job then sometimes your previous employer will get in touch to offer you a settlement agreement – normally settlement agreements are offered (and completed) before you leave your job but we certainly have seen cases where a former employer has come forward to offer a settlement agreement after an employee has left their job. If this happens then you can get advice on the terms of the settlement agreement and, if you’re happy with it, look to sign it – one of our employment solicitors can help you with your agreement.

In most circumstances, however, if you’ve already left your job without being offered a settlement agreement then it is probably unlikely that your previous employer is going to offer you a settlement agreement without a push from you (or a solicitor) to do so. If you think that you have been treated unfairly in your previous job, whether during your employment or at the termination of your employment, then you may have good legal grounds for a claim against your previous employer – you can use this to leverage a settlement once you have left. If you’re unhappy with how you’ve been treated by your former employer then contact us to speak to one of our employment solicitors for a no-obligation chat about your case and your options.

If your employer has already started a disciplinary process against you then this may, or may not, affect your ability to negotiate a settlement agreement (or the terms of the agreement) – for example:

1. If you have, by your own admission, committed an act of gross misconduct in the workplace (for example, if you’ve sexually harassed another colleague) then this reduces the chance that your employer may wish to offer you a settlement agreement (although it does not eliminate it) – your employer may, in such circumstances, feel under pressure to continue with the investigation or it may wish to set an example in terms of how it deals with you. However, it is not always the case that an employer will not be willing to offer a settlement agreement if you’ve engaged in serious misconduct, and our lawyers have certainly dealt with cases where settlement agreements have been offered (and negotiated) where an employee has accepted that they’ve engaged in serious misconduct in the workplace;
2. If you’ve been accused of misconduct in the workplace and you deny the allegation (or, alternatively, if you don’t deny it but the alleged misconduct is minor in nature): in this case you have a better chance of negotiating settlement agreement terms with your employer, particularly if you have more than two years’ continuous employment with them, as you may be able to assert a claim for unfair dismissal against your employer; or
3. If the disciplinary allegations being put to you are a sham and your employer is engaging in a sham disciplinary process: this could lead to a potential claim for unfair dismissal by you (if you have more than two years’ continuous employment) and/or a claim of discrimination if you think that you are being discriminated against by your employer (e.g. if you think that the reason why you’re being subjected to a disciplinary is because of your race or sex etc.)

The above list isn’t exhaustive, and other situations could potentially apply, so get in touch with us if you’d like to discuss further.

“Without prejudice” communications are normally sent from an employer to an employee (or vice versa) where there is a dispute, or potential dispute, between the employer & the employee and one party wishes to make an offer to settle that dispute.

You would normally use a “without prejudice” offer where you want to make a settlement offer. For example, if you have been discriminated against then you may wish to send a without prejudice offer to your employer to try and settle your potential discrimination claim.

The “without prejudice” rule is a legal way of ensuring that the parties making offers to each other can limit who can else see those offers. For example, if you make a without prejudice offer to your employer then neither party can normally show that offer to a court or tribunal, unless specific exceptions apply (e.g. there wasn’t a genuine offer to settle or one (or both) of the parties has reserved the right to rely on the correspondence if they want to make an application for their costs).

A “without prejudice” communication is different to a protected conversation as different rules apply to a without prejudice offer than an offer put forward in a protected conversation; however, without prejudice communications and protected conversations are similar enough that the terms are often (although incorrectly) used interchangeably.

If your employer has already started a performance improvement process, or has threatened to start one, then in our experience there’s a good chance that a settlement offer will be made to you by your employer (particularly if you have more than two years’ continuous service and can therefore bring an unfair dismissal claim against them, should you be dismissed for performance reasons).

Employers are normally keen to explore settlement if allegations of poor performance have been made against an employee, for the following reasons:

1. A performance improvement process (“PIP”) requires quite a lot of management team and business resources to undertake: the employer will need to ensure that the employee is provided with the appropriate training and mentoring, that they’re aware of what targets they need to make and are given feedback on how they’re doing, and that the employee is given the appropriate time to improve their performance. Offering a settlement agreement, in these circumstances, can mean that the employer avoids having to expend a lot of resources on carrying out a performance improvement process;
2. Performance improvement processes take a lot of time to undertake, as your employer will normally need to give you between four weeks and eight weeks to start and finish a PIP. Offering a settlement agreement allows your employer to expedite the process, should the parties agree settlement terms; and
3. You may have a claim against your employer in the Employment Tribunal if you are dismissed for performance reasons – this could potentially range from a claim for unfair dismissal to a claim of disability discrimination. Settling your claim (via a settlement agreement) will allow your employer to limits its liability to you, and avoid a claim being brought against it in the Employment Tribunal

If you’ve been threatened with, or put under, a performance improvement process then get in touch with us to speak with one of our expert employment solicitors.

A “protected conversation” is a legal mechanism whereby your employer can have a ‘full and frank’ conversation with you about concerns that it has about your employment, and can put forward an offer of settlement, without either party being able to use the fact or contents of that conversation as evidence in an Employment Tribunal.

In order for there to be a protected conversation there must be:

1. A communication between the employer and the employee about concerns that the employer has about the employee’s performance (for example, relating to the employee’s performance, their conduct, or a period of ill-health absence); and
2. A settlement offer made by the employer to the employee

The “protected conversation” can be in writing or verbal, although in our experience they tend to be (but are not always) verbal.

In order for a communication to be a protected conversation there must be an offer of settlement put forward; if no offer of settlement is put forward then the communication will not be a protected conversation.

If your employer has had a protected conversation with you then you will normally need to speak to a specialist employment solicitor in order to discuss the settlement offer that is being put forward (and the settlement agreement, if they have already provided that to you).

“Subject to contract” is a legal term used when two parties are negotiating a contract.

In an employment context, the wording “subject to contract” normally means that, where an offer is being put forward by an employee or an employer, the terms of that offer are incapable of being accepted until both parties have signed the relevant contract (whether it is a bonus agreement, contract of employment or a settlement agreement).

In settlement agreement negotiations the wording “subject to contract” (and “without prejudice”) should always be used when negotiating the terms of the settlement agreement (the contract of settlement between an employer and an employee) to avoid a situation where, if you put an offer forward in an email, your employer could potentially accept the terms of that offer and treat it as a binding contract.

In general terms, if you sign a settlement agreement then you will (should the settlement agreement be well-drafted, which they usually are) normally be settling any and all past, present or future claims that you could have against your employer (or its employees, directors etc.) arising out of your employment or the termination of your employment – as well as other claims, the settlement agreement will almost always settle the following:

• Any claim for unfair dismissal or constructive unfair dismissal
• Any claim for breach of contract or wrongful dismissal
• Any claim for any outstanding holiday pay
• Any claim for any statutory or enhanced redundancy payment
• Any claim for discrimination, harassment or victimisation

Although you will normally be settling all of the above claims, you will not normally be settling the following types of claim under a settlement agreement:

• Any claim for any personal injury that you’re not aware of (and should not reasonably be aware of) as of the date that you sign the agreement;
• Any claim for your accrued pension;
• Any claim to enforce the terms of the settlement agreement

You can technically try and ‘carve out’ any type of claim that you want to preserve your ability to bring, but your employer will also want to try and reduce your ability to bring a claim after you sign the settlement agreement (so you should normally expect some ‘push back’ if you try and carve out particular claims).

The short answer to this question is: yes, of course – you can settle a claim at any stage in the process of your claim, whether it is before you bring a claim (often referred to as “pre-action”) or during your Employment Tribunal claim (once you have issued your claim in the Employment Tribunal).

If you want to settle your claims then the only things that will normally prevent you from doing so are: 1) whether your (previous) employer wants to settle as well; and 2) if your (previous) employer does want to settle, whether it is possible for the parties to agree on settlement terms.

If you are looking to settle your potential Employment Tribunal claims before you actually bring a claim in the Employment Tribunal then you would normally use a statutory “settlement agreement” to do so.

If you’ve already brought your claim in the Employment Tribunal then you would normally use an ACAS “COT3 agreement” to settle your claims – the reason why using a COT3 is better once you’ve brought an Employment Tribunal claim is that once you have settled your claim via a COT3 agreement then ACAS will be able to automatically inform the Employment Tribunal that the case has settled. This is particularly useful where the Employment Tribunal hearing is imminent.

The answer to this question depends on whether not there are any terms in the settlement agreement covering what you can say about the agreement (or the terms of the agreement, or the circumstances giving rise to the agreement) to any third party.

In most cases a well-drafted settlement agreement will contain two types of clause which restrain what you can say about the agreement, and to whom, once you have signed it:

1. Confidentiality clause: this is a clause which requires you and/or your employer to maintain confidentiality about the existence of the settlement agreement, the terms of the agreement, and/or the circumstances giving rise to the agreement;
2. ‘Non-derogatory’ clause: this is a clause which requires you and/or your employer not to say anything adverse, negative, derogatory and/or defamatory about the other

If these clauses are in your settlement agreement then you will need to be careful about what you say about your employer and/or the agreement to any third party, as if you breach the agreement your employer could potentially threaten to sue you for breach of contract (and could potentially carry through with such a threat, if you cause serious harm by breaching the agreement – such a claim being brought is, however, reasonably rare).

If your employment is terminating under the terms of a settlement agreement then your employer will normally include a reference in the settlement agreement.

The form of the reference given by your (previous) employer under the settlement agreement will normally be a “standard factual” reference which simply states the dates that you were employed to and from, as well as the position you most recently worked in.

In some circumstances you may be able to negotiate a more ‘positive’ reference which includes positive value judgements about you, but these are relatively rare under terms of settlement agreements.

There is nothing to compel you to sign a settlement agreement: you have to be confident that, before signing it, it is (weighing up all factors) in your interest to do so. If you don’t think that it’s in your interest to sign the settlement agreement then it is open to you not to sign it.

In almost all circumstances your (previous) employer will pay a contribution towards the cost of your legal fees for receiving advice from a solicitor on the terms of the settlement agreement. This legal fee contribution will normally be in the range of between £250 plus VAT and £750 plus VAT (with the average being approx. £500 plus VAT), although for more complex situations and/or senior exits the employer will quite often pay between £1,000 plus VAT and £3,000 plus VAT for the employee to receive the advice on their settlement agreement.

In most circumstances you, as the employee, will normally be able to get your fees covered for the advice in their entirety by the employer (particularly if you are being offered reasonable terms, the settlement agreement is well-drafted, and you are reasonably happy with what you’re being offered).