What is a settlement agreement?

A settlement agreement is a legal, written contract under which an employee and their employer agree terms to resolve employment issues or disputes. Settlement agreements are usually offered as a way to bring the employment relationship to an end.

Usually an employee will agree not to bring an employment law claim, such as unfair dismissalwrongful dismissal, or discrimination against their employer. In return, an employer will often agree to make a lump sum payment, usually called a termination payment.

Settlement agreements can also be given to ‘workers’ (in the legal meaning of the term) in respect of claims which they might have, such as a claim enforcing the right to paid holiday.

Why have I been offered a settlement agreement?

Settlement agreements are used in a variety of different circumstances, usually to end an employment relationship without having the risk of a claim.

Often an employer will use a settlement agreement where they are making redundancies and have decided to pay more than the minimum amount of redundancy pay that they are required to make by law (see Redundancy).

A settlement agreement may also be used where there has been a breakdown in the relationship with the employer, or between employees.

It might also be used in circumstances where the employee has been on long-term sick leave or where there is some form of dispute between the parties as an alternative to a grievance or disciplinary outcome.

For advice on settlement agreements, we offer a free 15-minute consultation – contact us today or call us on 01423 788538.

The letter enclosing the settlement agreement says “without prejudice”. What does this mean?

When conversations or letters are said to be “without prejudice” it means that neither the employer nor the employee can refer to them in any court or tribunal proceedings, provided certain rules have been met.

For example, if an employer wants to end the employment of an employee because they are not meeting their performance targets, and a settlement agreement cannot be agreed between them, the employers are unlikely to want a tribunal to know that a settlement agreement was even offered. This is because it could look like any dismissal was a foregone conclusion and, therefore, cast doubt over whether it was fair.

Likewise, if an employee wants to make the offer of settlement, they will not necessarily want a tribunal to know the amount they are prepared to settle for, in case this impacts on the tribunal’s assessment of compensation.

employee settlement agreement

The “without prejudice” rules

Simply writing “without prejudice” on the top of a letter or email, or saying that a conversation is “without prejudice”, will not always make it so!

In order for something to be truly “without prejudice” there must already be some form of dispute between the parties, and bringing a court or tribunal claim is being considered as a result. For instance, the employer will need to have raised performance or conduct concerns as part of a formal process, or the employee will need to have an unresolved grievance.

Further, the “without prejudice” tag cannot be used to hide discrimination or really inappropriate behaviour, such as blackmail or threats.

In 2013, the government introduced “protected conversations” which work in a similar way to “without prejudice” discussions but which can prevent settlement agreement discussions being referred to in any later tribunal proceedings, even if there is not an existing dispute. However, this only applies to ordinary unfair dismissal claims and not to: claims for automatically unfair dismissal (for instance, if you are dismissed on health and safety grounds or for being pregnant); wrongful dismissal; or to discrimination claims. It also does not apply where there has been improper behaviour (such as undue pressure, harassment, assault or victimisation).

ACAS have produced a code of practice on how to keep settlement agreement negotiations confidential. This recommends that employees are given 10 calendar days to consider the offer and that they be allowed a companion (a colleague or trade union representative) at any meeting to discuss the offer.

Contact us if you need advice on this.

Why do I need to see a solicitor?

Employees enjoy a number of important employment law rights, including the right not to be unfairly dismissed; the right to paid holiday; and the right not to be discriminated against (see discrimination claims).

Given that these rights protect employees, the law says that any agreement that limits or excludes these rights is void (i.e. cannot be relied upon by the employer) unless certain conditions are met.

One of these conditions is that the employee (or worker) must have received advice from an independent advisor. An independent advisor is defined as a qualified lawyer (i.e. a solicitor) or, so long as other conditions are met, can also include a trade union official or advice centre worker.

In addition, the settlement agreement must give the name of the advisor and the advisor must also have insurance in place to cover the risk of a claim by the employee should the advice they give be wrong.

But a solicitor can do more than just advise you on the effect of the settlement agreement, they can also advise you on what the terms mean, any terms you might want changing and any additional terms that should be included outside of the legal requirements. At Truth Legal we will always try to negotiate the best deal for you.

What else must a settlement agreement include?

To be a valid settlement agreement, the contract must be in writing, it must relate to particular proceedings (i.e. to the types of claim the individual employee might be able to bring) and it must also contain a statement that the legal requirements have been met.

What claims can be settled via a settlement agreement?

Most employment law claims – whether they are based on the employee’s contract of employment or specific laws providing employees with protection – can be settled by way of a settlement agreement.

These include claims for:

  • breach of contract including wrongful dismissal (when you have not been given enough notice or notice pay);
  • unlawful deduction from wages (where your employer pays you less than they should without the right to do so);
  • claims in relation to holiday and holiday pay;
  • claims in relation to the amount of time you have worked and rest breaks;
  • unfair dismissal;
  • equal pay
  • discrimination claims on the basis of:
    • sex
    • race
    • disability
    • sexual orientation
    • religion or belief
    • age
    • gender reassignment
    • pregnancy and maternity
    • marriage or civil partnership
  • being denied rights to time off;
  • breaking laws in respect of flexible working;
  • breaking laws protecting part-time workers;
  • breaking laws protecting fixed-term employees;
  • not paying the national minimum wage;
  • not making a redundancy payment;
  • existing personal injury (see Everything you ever wanted to know about accidents at work);
  • protection from harassment; and
  • breaching European employment laws


What claims cannot be settled by way of a settlement agreement?

There are a limited number of claims that cannot be included in a settlement agreement. These include claims for a failure to inform and consult in circumstances where there is a collective redundancy i.e. where an employer proposes to dismiss 20 or more employees for reasons other than their conduct, ability or health. Likewise, a settlement agreement cannot prevent claims for failing to inform and consult where there is a transfer of a business from one owner to another.

Are there any types of claims not usually included?

In addition, it is common for other claims to be excluded as a matter of course – such as personal injury claims where an injury may have occurred but the employee is unaware because they do not have any symptoms (such as where there has been exposure to asbestos), and claims in relation to accrued pension rights.

Since I have to see a solicitor, who pays for this?

It is standard practice for employers to make a contribution towards an employee’s legal fees if they offer them a settlement agreement.

The usual contribution ranges from £250 to £500 plus VAT. In complex situations, some employers contribute £1,000 plus VAT towards the legal advice.

However, an employer does not have to make a contribution and sometimes they avoid doing so (especially if the employee has been the one to ask for the agreement).

At Truth Legal we won’t charge you for your first short consultation, even if you decide not to instruct us. Where possible, we will try and keep our fees to the contribution offered by your employer. However, where terms need negotiating, it may be necessary to charge you for this unless we can get your employer to increase their contribution to cover it. Whatever the position, we will keep you informed so that you do not get any nasty surprises.

Do I have to agree to the settlement agreement?

Most employees may have an inkling that the writing is on the wall if they are being taken through capability proceedings due to what their employer sees as under-performance. But, nevertheless, being offered a settlement agreement can be a shock, particularly if it is presented out of the blue.

Careful consideration has to be given as to whether to accept the offer of a settlement agreement or whether to accept it if some of the terms are changed, such as being offered more money or a reference.

In order to decide whether to accept the agreement (or to try and negotiate different terms), it is necessary to know what will happen if you don’t. This will very much depend on the individual circumstances that have led to the settlement agreement being offered.

For example, an employer offers a settlement agreement to an employee without the employee being aware of any concerns up to that point. The employee refuses to sign the agreement and is subsequently dismissed due to a conduct or capability reason (their ability to do their job). In this situation, the employee would have a strong argument that the dismissal is unfair, as the employer had clearly decided they wanted the employment to end when the settlement agreement was offered, even though they had not carried out any form of procedure. See unfair dismissal.

But just because an employee would have a good unfair dismissal claim if they were dismissed after refusing to agree to a settlement agreement, does not mean that is the best decision.

It is important to consider how much is being offered compared to the compensation the employee is likely to receive. This will depend on a number of factors including the type of claims they have; for how long they have been employed; and how quickly they are likely to find another job. The cost of bringing the claim to tribunal also needs to be considered, the time it would take and, sometimes, the stress it might cause.

What terms are usually included?

Most settlement agreements are fairly standard documents usually covering the following:

  • the date the employee will leave (or left);
  • an agreement to pay the employee their normal wages and benefits up to the leave date;
  • an agreement to pay the employee their contractual or statutory notice;
  • an agreement to pay the employee the termination payment;
  • a tax indemnity (see below);
  • the types of claims being settled;
  • an agreement by the employee not to bring any claims or to withdraw any claims that have already started;
  • confidentiality;
  • returning company property; and
  • terms dealing with the legal requirements (see above).

The agreement should also state when the payments will be made and sometimes an employer will be willing to agree to pay the amounts sooner.

An employer may also want an employee to agree to not approach their clients or customers, or to poach their staff, for a certain amount of time. These terms are called restrictive covenants. Whether an employee should agree to any new restrictions will depend on the settlement as a whole and any future plans they may already have.

Employees may also want an agreement that the employer provide them with a reference and to ensure that any expenses and holiday pay are paid. Where there has been a verbal agreement that an employee can keep certain company property, such as a mobile phone, this should be included in the settlement agreement.

Depending on the circumstances around the employee being offered a settlement agreement, it may also be sensible to agree an announcement to staff or customers as to why the employee is leaving.

In most situations, an employer will be willing to consider amendments and new terms unless a large number of employees are being offered a standard settlement agreement as part of a redundancy exercise.

Can I talk about the settlement agreement with anyone else?

Most settlement agreements will contain a confidentiality clause setting out who the employee can tell about the terms of the agreement and even its existence. Usually, this will be limited to either the employee’s spouse, civil partner or partner, or a slightly wider group of “immediate family”.

Is a settlement agreement the same as a non-disclosure agreement (NDA)?

There has been a lot in the media about non-disclosure agreements (NDAs). A non-disclosure agreement is an agreement by an employee to keep events and circumstances around their employment and, if applicable, its termination, confidential. They also usually require the employee not to say anything that could damage the reputation of the employer, or the employer’s owners, directors or employees.

The use of NDAs has received negative attention as they can be used to stop inappropriate behaviour (such as sexual harassment – see Discrimination claims) by a senior person in a business being investigated, allowing the behaviour to go unchecked, leaving others vulnerable, and giving the victims little choice but to leave their jobs or careers.

The vast majority of settlement agreements will contain NDAs (usually referred to as a confidentiality clause in the settlement agreement). Many employers would not enter into a settlement agreement without a confidentiality clause in some form.

This isn’t usually to cover up inappropriate behaviour. More often confidentiality clauses are used to protect the employer’s business information and also business interests in preventing a “settlement culture” from developing. A settlement culture is where an employer is known to agree to settle disputes (even if the potential claims are not strong) in order to avoid tribunal and therefore encourages employees to raise grievances and bring claims which have very little merit.

Also, if other employees know what another colleague has been paid as part of a settlement, it will influence what they expect to receive, making future agreements harder.

However, a confidentiality clause should not be used to stop whistleblowing, i.e. an employee’s appropriate reporting of illegal or unlawful activity by the employer. It should also not hinder an employee’s ability to report criminal acts to the police. In addition, more restrictions on how confidentiality clauses can be used where cases involve allegations of sexual harassment may also be introduced in the future.

What happens if I breach the confidentiality agreement?

If an employee breaches the confidentiality clause by telling people (other than those they are permitted to tell under the terms) about the agreement, then this will be a breach of contract and the employee could be sued by the employer for any financial loss which the breach of confidentiality causes. This can be difficult to assess and calculate.

Depending on how any clause relating to references is written, the employer may also refuse to provide an employee with a reference.

If confidentiality is breached before the settlement monies are paid, there is a risk that the employer may not pay the employee depending on the terms of the agreement.

Will I have to pay tax on the money I receive under the settlement agreement?

Tax can be a complicated area. Basically, any money received that is part of your normal wages or salary should have tax and national insurance contributions deducted. So, any pay up to the leave date will be taxable as will any holiday pay.

In addition, an employee will have to pay tax and National Insurance in respect of their notice period (whether or not this is worked). This is called Post-Employment Notice Pay and there are rules around how this is calculated.

It is no longer possible to argue that no tax should be payable in relation to a notice period. Therefore, if no reference is made to the notice period, and notice has not been worked, tax will become payable on part of the termination payment. This will reduce the amount the employee will receive, or the employee may be asked later to pay the tax (or refund the employer any tax they have had to pay on the employee’s behalf).

The issue of notice aside, termination payments under £30,000 are not taxable.

What is a tax indemnity?

A tax indemnity is an agreement that, should HMRC (the tax authorities) decide that the right amount of income tax has not been paid in respect of the money received under a settlement agreement, the employee will be responsible for paying any tax owing (and usually any penalties) or will have to refund the employer if the employer has been asked to pay it.

Most employers are usually unwilling to remove the tax indemnity in the agreement.

How quickly will I be paid?

The date or time period after which payments will be made should be set out in the agreement. Any outstanding salary or notice payments are usually made as part of the next payroll. The termination payment is often expressed to be paid within a certain number of days after the leave date, such as within 14 days, so long as the employee has returned a signed copy of the settlement agreement and has complied with all the other terms – such as returning company property. An employer might be prepared to pay the money sooner and this can sometimes be negotiated.

Sometimes an employer will want to pay the termination payment in instalments. This can be risky as it is possible the employer could go out of business before all the money is paid. It also means it’s harder for the employee to move on whilst they are still owed money. However, if the employer is having financial difficulties, or just poor cashflow, this might be the only way to eventually secure the full amount.

What happens if I am not paid?

It is quite rare for an employer not to make the payments agreed.

But, if a settlement agreement contains all of the legal requirements, then even if the employer does not pay an employee as agreed, it will still stop an employee from bringing any of the claims listed in the agreement.

However, the employee will have a breach of contract claim which can be brought in the court unless the employer is entitled to withhold payment under the terms of the agreement. This might arise where the employee has warranted (i.e. legally promised) they do not have another job when in fact they have or if the employer has subsequently discovered the employee had committed an act of gross misconduct (so long as the agreement allows the employer not to pay in these circumstances).

Contact Truth Legal

With an honest and ethical approach to law, Truth Legal can help you in all of your employment law matters, including settlement agreements for employees. Our specialist team of employment lawyers is headed up by Navya Shekhar, an employment law solicitor who has vast experience in advising employees and employers, and assisting them with legal disputes.

Let us help you with your employer’s settlement agreement today – call us on 01423 788538 or contact us here.

Truth Legal team photo

Make An Enquiry

Contact the Truth Legal team today.

"*" indicates required fields

More Legal Guides

Comprehensive and free legal guides from Truth Legal Solicitors.