Kate Brooks
Partner, Solicitor & Head of Employment/HR Services
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Date Published:30 May 2017 Last Updated:16 Jan 2022

What to expect in a settlement agreement – settlement of employment claims

Employment Law Advice

A settlement agreement (formerly know as a compromise agreement) is a written agreement between an employer and an employee. The employee agrees to waive all employment claims in return for a payment. This normally happens on termination of employment.

Sometimes the settlement agreement will be entered into some months before the termination date. In this situation it is prudent for the employer to ask the employee to enter into a second reaffirmation settlement agreement.

The settlement agreement usually contains a brief background setting out the date and reason for the termination of employment.

The parties are free to agree a retrospective or future termination date. The employee should be paid in respect of all wages accrued up to the termination date and provision made for the notice period. The employee will continue to be entitled to contractual benefits up to the termination date.

In return for waiving employment claims, the employer usually makes a termination or settlement payment to the employee. This payment can be paid in a lump sum or instalments. The most common payment terms are within 14 or 21 days of the termination date. The termination payment element can normally be paid tax free up to £30,000. It is standard for the settlement agreement to include a tax indemnity clause meaning that the employee will be responsible for any future tax.

The only claims the employee cannot waive are claims for future personal injury, accrued pension rights and to enforce the settlement agreement.

The agreement will also contain provision for returning all company property. Sometimes as part of the settlement the employee may be allowed to retain company property for example a mobile phone, computer or car.

It is sensible to also agree a reference and if relevant an announcement to be made to staff members.

Usually both parties will agree to keep the terms of the agreement strictly confidential and not to make bad comments about each other in the future.

It is advisable to include clauses that re-iterate obligations of confidentiality and post termination restrictions.

The employer should make a contribution towards legal fees so that the employee can have the settlement agreement explained. This contribution is normally anything from £250 plus Vat upwards. We always aim to keep our costs within the contribution.

ACAS have published a comprehensive guide in relation to settlement agreements with further information.

If you have been given a settlement agreement please contact me on 01202 057754 or kate.brooks@ellisjones.co.uk