Settlement agreements: what you need to know before signing

06 September 2021

Before you sign a settlement agreement make sure you read this article.

What is a settlement agreement?

A settlement agreement is a legally binding contract which can be used to end the employment relationship, on agreed terms, in exchange for compensation.

In many cases, your employer will want to make a payment to you in return for an effective waiver of any claims you may have against them.

This may happen where your employment is continuing, but it is most common where your employment has terminated (or is about to be terminated).

Why do I need to speak to a Solicitor about my settlement agreement?

It is a requirement for you to receive advice, from an independent adviser, on the terms and effects of the settlement agreement, in order to ensure the settlement is enforceable. You as an employee are required to waive your rights to bring certain claims against your employer and any parties referred to in the agreement.

The advice does not need to be in person and can be done via telephone or video call.

Your adviser should provide advice on what potential claims you may have. They can also discuss with you the figures offered and whether you should be asking for more compensation.

After receiving advice, you may decide not to enter into the settlement agreement and instead bring an Employment Tribunal claim. Your adviser should present you with the options and give their opinions on the best way forward.

If you are happy with the terms then the independent adviser will sign confirming they have provided advice.

How much does a settlement agreement cost?

Usually, your employers will offer to contribute towards the cost of your legal fees.

If you need more substantive advice or if any amendments need to be made then the contribution may not cover the costs of the advice and you would be liable for any additional legal costs. In these circumstances, you could ask your employers to increase their contribution.

What are the key terms of a settlement agreement?

The settlement agreement should outline how much you are receiving as compensation as well as the position with your pay, benefits and notice.

It should also clearly outline the tax treatments for each payment. Most agreements contains a tax indemnity which means that you would be liable for any tax and national insurance on the payments, if they are incorrectly taxed.

Most settlement agreements will also include clauses dealing with the following:

  • returning property
  • confidentiality and other restrictions
  • employee warranties
  • references
  • post termination obligations (restrictive covenants).

The agreement may also include clauses dealing with:

  • share options
  • pension payments
  • company cars and expenses
  • announcements
  • intellectual property.

If there are terms in your employment contract you are unhappy with then you can ask your employer to waive these in the settlement agreement. You should consider what your next role may be and whether you are still able to comply with the terms in your contract, as you may have signed your employment contract some time ago.

If you are suffering from work related stress or a mental health condition, you could request your employers pay for counselling services, as part of the agreement, to assist you in your recovery.

“Without Prejudice”

When negotiating a settlement agreement, your employers will usually specify that all communications should be treated as "without prejudice".

The without prejudice rule will generally prevent statements which are made in a genuine attempt to settle a dispute, being put before the Employment Tribunal or court. This is to allow you and your employer to speak freely in negotiations.

Neither party is legally bound by anything ‘agreed’ in the negotiations until a final written agreement is signed.

What happens if I do not want to sign the settlement agreement?

If, after receiving advice, you decide not to sign the agreement or if your adviser advises you not to sign the agreement then your employer will withdraw their offer and you would continue, as if an offer was never made.

After receiving advice, you may decide not to enter into the agreement and instead bring an Employment Tribunal claim. Your adviser can present you with your options and give their opinions on the best way forward in the circumstances.

What do I do after signing a settlement agreement?

You remain employed by your employer until the termination date and remain bound by the terms of the agreement and your employment contract.

You can start to look for a new job but you should not start the job until after you have left.

If you would like to discuss your individual circumstances and settlement agreements further, please get in touch with Rebecca Hughes via [email protected] or 01473 406325. Alternatively, please contact another member of Birketts' Employment Law Team.

The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at September 2021.


Rebecca Hughes


+44 (0)1473 406325


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