Settlement Agreements

One of the most common ways of ending an employment relationship is through a Settlement Agreement.

Settlement agreements (formerly known as compromise agreements) are legally binding contracts between an employee and employer whereby both parties agree to mutually terminate the employment relationship and contractually agree not to make any future claims against each other. They often involve a financial payment from the employer in exchange for the employee releasing their claims against them.

Settlement agreements are also used in redundancy situations and can be part of an enhanced package for a voluntary redundancy.

Key overview points

• Settlement Agreements offer certainty and a “clean break” for both parties. For employers, they are a good way of avoiding protracted issues such as grievances or disciplinary action. For the employee the advantage is a secure agreed-upon termination package.
• A Settlement Agreement requires the employee to have received independent legal advice (usually at the employer’s expense) on its terms.
• Settlement Agreements are very standard in terms of content, so as to comply with the statutory requirements. They typically include termination payment details (notice pay, redundancy, etc.), confidentiality clauses, non-compete clauses, and release of claims.
• The role of the lawyer advising the employee is to ensure the employee fully understands the agreement’s implications and waives their claims knowingly. It is sometimes possible to negotiate an improvement on the financial offer made.

If you need experienced employment lawyers for the necessary legal advice on a settlement agreement, we are an ideal choice. We are experienced, practical and can advise fast, often on the same day.

We also advise on important aspects of settlement agreements including advising on restrictive covenants, contractual entitlements such as bonuses or sale  commissions (if your pay is partly based on targets or performance), whether the employer will agree to give a reference and if so, on what terms and the tax position on ex-gratia compensation offered.

Likely amount of compensation

There are no set rules. Much depends on the underlying situation between employer and employee. In dealing with many settlement agreements each year, the typical amount offered by employers is somewhere between 2-4 months gross salary over and above contractual and statutory entitlements. For employees working in the  City financial sector institutions the compensatory amount is often higher and can be between 6-12 months.

Settlement Agreements in redundancy situations

It is important to note that settlement agreements are not just used where there is a workplace dispute, they can be used to ensure a rapid and harmonious termination where redundancy might be necessary or for other reasons.

 Full and final nature of settlement agreements

A key aspect for employees who have been offered an employment termination agreement to understand is that the agreement is largely standard and comprehensive in the sense that the employee will, if he or she signs, be contractually agreeing not to pursue almost every kind of potential post employment claim against the employer. The exception of most note is that it is not possible for an employee to contract out of potential personal injury claims which neither the employer or employee are currently aware. This generally means latent diseases such as asbestosis which can take many years to show symptoms.

Are payments received taxable?

Payments related to ending your employment, like notice pay, redundancy pay, and payments in lieu of notice (PILON), are generally taxable. There’s a tax-free limit of £30,000 on these payments, but any amount exceeding that gets taxed as income. Unpaid wages and holiday pay are considered earnings and taxed like your regular salary.

Compensation for injury to feelings: If related to workplace discrimination or bullying, this is typically taxable unless considered compensation for psychiatric injury. Payments for actual physical or psychiatric injury sustained during employment might be tax-free.

Please do get in contact if you need independent legal advice on a settlement agreement offered to you to terminate your employment.