Settlement Agreement FAQs

More employers are offering settlement agreements to avoid carrying out lengthy and costly legal processes and litigation. With the help of a legal adviser, you should look closely at what you are being offered in a settlement agreement. Due to the cost of living rising and depending on your individual circumstances, you may wish to try and negotiate with your employer to ensure that you are achieving the best possible outcome.

Am I being offered enough in my Settlement Agreement?

As a minimum, you are entitled to your salary and benefits up to and including the termination date, your contractual notice entitlement (you can agree to work your notice period or be paid in lieu of all or part of your notice), and a payment in respect of any accrued but outstanding holiday. These payments will be subject to deductions for tax and national insurance.

The amount of compensation offered for loss of employment will depend on your situation but this should be sufficient to compensate you for the legal rights you are giving up. Depending on your situation, it may be possible to negotiate a higher compensation payment.

What are the tax implications of a Settlement Agreement?

The tax legislation provides that an employee can receive up to £30,000 tax free in respect of a compensation payment. This must be genuine compensation and not include anything that would fall under the definition of earnings. Any amount over £30,000 would be subject to deductions for tax and national insurance.

Does my ‘reason for leaving’ matter?

Although it is not required, it may be beneficial to include the reason for leaving in the settlement agreement. This will help you know what to say to colleagues and future employers, as the terms of a Settlement Agreement are usually confidential. The most common reasons are “redundancy” and “mutual agreement.”

If you will be hunting for a new job, you may also want to secure a reference and agree the specific wording during negotiations.

Do I have to pay for my legal fees?

Legal fees refer to the cost of having your Settlement Agreement explained to you by a legal advisor. This is a requirement as you are entering into a legally binding agreement. It is common practice for employers to provide a contribution towards your legal fees which should cover the costs of you obtaining advice on the Settlement Agreement. The amount your employer is contributing should be included in the Settlement Agreement itself.

What if my employer does not pay my legal fees in full?

This usually means you will have to pay the difference between the amount your employer has contributed towards your legal fees and the full fee charged by your legal advisor. At Ellis Jones we guarantee to cap our fees at the contribution offered by the employer for explaining the agreement to you. If you would like assistance with negotiating terms, we will provide you with a separate fee estimate for this work.

Will a settlement agreement affect my chances of getting another job?

No. There will likely be a confidentiality clause in the settlement agreement which prevents you from disclosing the agreement to any prospective employer.

If you will need to start searching for a new job after your termination date, you should check the terms of your Settlement Agreement as this may refer to post-termination restrictions. These could be repeated from your contract of employment or may include fresh restrictions. For example, a restrictive covenant may include a ‘non-compete’ clause which will prevent you from working for your employer’s competitors for a period of time. It may be possible to agree to amend a restrictive covenant or to release you from the restrictions altogether via negotiations with your employer. This is something that can be discussed with your legal advisor.  .

If you have a settlement agreement, our Employment Solicitor, Rebecca Goudy would be happy to assist you. Please contact settlementagreements@ellisjones.co.uk or Rebecca.bennett@ellisjones.co.uk or phone 01202 525333.