Settlement Agreements: A Beginner's Guide - Talbots (2025)

by James Monk | May 2, 2024 | News, Blog

Settlement Agreements: A Beginner's Guide - Talbots (1)

What is a settlement agreement?

You may also have heard of a settlement agreement by its old name – a ‘compromise agreement’. In short it is a legal contract, often governing the end of the employment relationship with an employee or employer, although they can also be used to settle employment claims while in employment.

They can be used in multiple scenarios but common amongst them are to agree a mutual exit pending potential:
(i) Disciplinary action.
(ii) Performance concerns.
(iii) As part of a voluntary redundancy process.
(iv) Following a request by an employee.

What sets a settlement agreement apart from other legal contracts though is that there are prescribed legislative requirements of a settlement agreement. If those requirements are not met the agreement might still be contractually binding in places but it cannot settle statutory claims.

One of the prescribed requirements of a settlement agreement is that the employee needs to take advice on it from a solicitor or other named person as set out in the legislation and this is why you must meet with a solicitor to take advice on the agreement.

This can be a worrying and frightening time for some employees, while others are happy with the deal and want the matter dealt with as quickly as possible. Wherever you sit on this scale the most important point to remember is that help is only a phone call away…. James Monk (Director and Head of Employment Law) 01384 447 770.

What should I do if I’m given a settlement agreement and what are my options?

I have been given a settlement and been told I need to see a solicitor but how do I find one of those?

Aren’t all solicitors expensive and unfriendly? Do I need to sign the agreement? What am I going to do next? These are just a sample of the questions that can go round in people’s heads when offered a settlement agreement and the main question that people have is what are the options available to them?

While the options can be various, in broad terms they are:
(i) Don’t accept the agreement
There is no requirement for you to accept a settlement agreement, so if you are not happy with what is being offered you do not have to accept it. Careful thought needs to be given however before rejecting a settlement offer, especially when the alternatives may be disciplinary action.

(ii) Negotiate the settlement offer or terms
It may be that you are happy with the deal in principle but want better terms. It is open for you or someone on your behalf to try and negotiate the terms of the settlement agreement. Again, care should be taken with any settlement negotiation, pitch the offer too low and it will be difficult to ask for more in the future, pitch the offer too high and it might put off the employer into agreeing terms and could in extreme circumstances even lead to an employer removing their offer. It must be remembered that any agreement is not binding until signed by both parties and there is nothing to stop a party withdrawing the offer before that time. Negotiation is as much an art as a science, and you should consider taking advice before entering such negotiations.

(iii) Accept the deal as it currently stands (subject to going through the terms with a solicitor or independent adviser)
If you are happy with the deal, then you may simply be willing to accept it as it currently stands.

What is a fair settlement offer?

In relation to settlement agreements, there is no one size that fits all; the same offer of settlement may be entirely acceptable for one person and unacceptable for another.

To emphasise how this is the case, we have set out two scenarios below:

Scenario 1

(i) Bob has been accused of violence towards his colleague Mike. He says Mike was being disrespectful to him but deserved a ‘slap’. The Company employing Bob has a zero-tolerance approach to violence in the workplace and lists violence as a ground they will consider as ‘gross misconduct’.

Following an investigation they have invited Bob to a disciplinary hearing and the invite letter says amongst other points, that if found guilty he may be dismissed without notice. The Company, under a separate process make an offer of settlement to Bob, which will pay him in lieu of his three months’ notice and his holiday pay accrued but unused up to the date his employment ends and give him an agreed reference.

Bob is worried what will happen if he is dismissed for gross misconduct, what will be said on his reference if he is dismissed in this way and how that will impact him getting another job and, also if he was dismissed without notice, the impact that would have on his finances. Bob decides in this situation to accept the offer. Could Bob have decided not to accept the offer – absolutely, he may have been willing to fight the case and try and keep his job. There is no one size that fits all.

Scenario 2

(ii) Alisha has been a good employee of 20 years with no disciplinary action against her. Her employer wants to make costs savings across the business and approaches Alisha with an offer of settlement that pay her in lieu of her notice pay, her holiday pay on termination and £6,000 as an ex gratia payment.

Alisha had been thinking about pursuing another career path already and decides to accept the offer, it will give her some money to make the adjustment. Jonathan gets made the same offer but decides to reject it, he is confident that if redundancies are made, he will be able to avoid being selected and the offer simply isn’t good enough for him to want to leave his job. He rejects the offer. Either approach carries both benefits and risks but either approach is not wrong, it is a matter for the individual.

You may want to consult with a solicitor about whether the amounts that you are being offered seem reasonable. There are certain statutory minimum payments that are often applicable and advice can be sought about this.

What sorts of payments are made under a settlement agreement?

The sort of payments that can be made under a settlement agreement change and will often depend, in part, on the circumstances of the matter and the employee’s financial package but may include the following elements:

(i) Payment until the date of termination: In most agreements there will be a clause that covers payment of salary to the date of the employee’s termination. The employee has worked those days so it is right that they get paid for them.

(ii) Notice pay: In most cases there will either be a provision allowing the employee to work out their notice to a future termination date or a promise stating that they will be paid in lieu of their notice.

(iii) Holiday pay: Any accrued but unused holiday pay should be paid on termination of the employee’s employment.

(iv) Ex-gratia payment/Termination Payment: A number of agreements will make provision for an additional payment to the employee in lieu of them signing the agreement.

(v) Car allowance: If a car allowance is paid or a car is provided as part of your employment then an employer may allow a payment under the agreement in relation to this.

(vi) Pension: sometimes a payment will be made into the pension scheme, either in lieu of any entitlement or as part of a settlement negotiation.

(vii) Outplacement support: some employers will make a contribution to outplacement support (a third party who essentially helps an individual with the next steps in their career e.g. drafting a CV).

(viii) Bonus: If a bonus is due then there can be provision made in the agreement to pay in lieu of this.

(ix) Shares– if the employee holds shares in the company there may be provisions made about how this will be dealt with on termination. Often these clauses requires specialist advice.

This gives you a flavour of the sort of payments that might be made but the agreement can cover whatever payments the parties negotiate between each other.

What does: ‘without prejudice’ ‘a protected conversation’ and ‘subject to contract’ mean?

As lawyers we often like to use phrases that you won’t hear in any other walk of life and while the use of Latinphrases is starting to die out (less ‘inter alia’ and ‘sine die’) there are still phrases that are commonplace that people outside of the profession struggle to understand and ‘without prejudice’ is one such phrase.

In essence the phrase ‘without prejudice’ is there to say, ‘you can’t use what I am about to say against me’. It is often used in the context of a settlement discussion, and it is an attempt to allow the individual to have a discussion about settlement without it being used against them. That is the theory but the law surrounding what can constitute a ‘without prejudice’ discussion in practice means that there has to be a genuine dispute in place, more than just a disagreement between an employee and employer for it to be applicable.

Often employers will use a ‘protected conversation’ instead of, or alongside, a ‘without prejudice’ discussion as part of a settlement discussion. Provided there is no undue behaviour which would negate a ‘protected conversation’ this essentially means that this conversation cannot be referred to later. There are some exceptions to this, for example such conversations could still be used in discrimination cases.

‘Subject to contract’ means that any discussion is subject to the wording of a contract and the terms within it.

How long does it take to negotiate a settlement agreement?

Some settlement agreements can be dealt with in 45 minutes, others can take weeks to finalise. This largely depends on;

(i) the background to the matter and if there are complex issues at stake that need to be looked at.

(ii) whether or not the employee wants amendments made to the agreement.

Often the employer and the employee will agree a deadline between them for the agreement to be signed.

Here at Talbots Law we do our best, wherever possible, to help you achieve your deadlines.

Will I be asked to sign a Non-Disclosure Agreement (NDA) or confidentiality agreement?

It would be unusual to be asked to sign a separate confidentiality agreement or NDA as part of the settlement agreement. It would however be entirely usual for the agreement to contain confidentiality provisions in it. These provisions typically cover the following points:

(i) A definition of confidential information and that the agreement must be kept confidential.

(ii) A clause dealing with the parties keeping the terms of the agreement and the circumstances surrounding termination confidential.

(iii) A clause meaning that the employee is unable to make any derogatory comments about the company and usually its employees, agents etc or do anything to bring these parties into disrepute. There is usually a similar clause on behalf of the Company towards the employee, however it is often not as stringent and only requires the company to use its reasonable endeavours or similar wording.

(iv) Detailed clauses containing exceptions to the position above for both the Company and the employee. For example, the employee being able to tell close family members about the agreement as long as they keep the information confidential.

Why does all this need to be done by way of a settlement agreement?

Firstly, the parties may want this to be done by way of a formal contract to ensure that the parties are legally bound by the terms they have agreed, and also to ensure certainty as to those terms. Furthermore, the government have legislated to say that for a settlement agreement to settle legislative claims it must comply with set requirements which broadly speaking are:

(i) The agreement needs to be in writing.

(ii) It needs to name the adviser that you received advice from about the terms and effect of the agreement.

(iii) It needs to state that it satisfies the legislative requirements of a settlement agreement.

(iv) It needs to relate to the particular complaints it is settling.

(v) The employee must have received legal advice from a relevant independent adviser on the terms and effect of the proposed agreement and its effect on the employee’s ability to pursue any rights before an employment tribunal.

(vi) The independent adviser must have a current contract of insurance, or professional indemnity insurance, covering the risk of a claim against them by the employee in respect of the advice.

This means that if an agreement that does not do the above it will not settle statutory complaints.

What is a warranty? What are typical warranties?

A warranty is essentially an assurance or contractual promise, the breach of which may give rise to a claim for damages.

The warranties in a settlement agreement can vary from agreement to agreement but often include:

(i) A warranty that the employee has not committed a fundamental breach of any express or implied term of their contract of employment.

(ii) That the employee has not received or accepted any offer of employment or form of income or benefits.

(iii) A warranty that they have taken advice from a relevant adviser as to the terms and conditions of the settlement agreement.

(iv) A warranty that the employee has deleted any information regarding the employer or associated employers from personal communication devices.

What is an indemnity? What are typical indemnities?

An indemnity effectively means a protection against or compensation for a loss or liability. The terms and exact scope of an indemnity will often be defined in the settlement agreement itself. Again, indemnities may vary from agreement to agreement but typically in a settlement agreement they will include:

(i) An indemnity for certain tax liabilities.

(ii) An indemnity that covers a breach by the employee of any term of the agreement or a claim brought by the employee against the Company.

While these indemnity clauses can be onerous clauses for an employee to sign up to, they are commonplace in settlement agreements. As such it is important that you take advice as to the terms and effect of these terms so you can understand what you are agreeing to.

If you need advice, please contact James Monk (Director and Head of Employment Law) on 01384 447 770.

Disclaimer

This information is for educational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given.

Settlement Agreements: A Beginner's Guide - Talbots (2025)
Top Articles
Latest Posts
Recommended Articles
Article information

Author: Nicola Considine CPA

Last Updated:

Views: 5643

Rating: 4.9 / 5 (49 voted)

Reviews: 80% of readers found this page helpful

Author information

Name: Nicola Considine CPA

Birthday: 1993-02-26

Address: 3809 Clinton Inlet, East Aleisha, UT 46318-2392

Phone: +2681424145499

Job: Government Technician

Hobby: Calligraphy, Lego building, Worldbuilding, Shooting, Bird watching, Shopping, Cooking

Introduction: My name is Nicola Considine CPA, I am a determined, witty, powerful, brainy, open, smiling, proud person who loves writing and wants to share my knowledge and understanding with you.