Employees Guide to Settlement Agreements in the UK
If you’ve been offered a settlement agreement by your employer, you may be wondering what’s in it for you. These agreements can be very complex so, it’s important you seek professional advice because once you sign the agreement you have to abide by the terms.
What is a settlement agreement?
A settlement agreement (formerly known as a Compromise Agreement) is a legally binding contract between an employee and employer. The employer offers payment or some other benefit to the employee, in exchange for the employee’s promise not to pursue any claims against them. The agreement also normally contains other obligations, such as confidentiality.
The purpose of a settlement agreement is to protect the employer, therefore it’s extremely important the employee seeks the professional help of a solicitor before signing the agreement. It’s also a legal requirement to do so, otherwise the agreement won’t be valid or binding.
For more information read our settlement agreements glossary of terms.
When would a settlement agreement be used?
Settlement agreements are used to draw a line under any disputes between the parties and ensure the employee doesn’t pursue claims against the employer.
They are typically used in voluntary severance cases or scenarios where the working relationship has broken down.
A settlement agreement won’t always result in the termination of employment. For example, it can be used to bring about a change to terms and conditions.
What should a settlement agreement contain?
The terms of a settlement agreement can differ depending on the circumstances. Nevertheless, a typical settlement agreement will normally contain the following:
- Clauses on pay and benefits
- The value of the payment (or benefit) you have negotiated with your employer
- Non-disclosure agreements
- The claims settled and any exclusions that apply
- How much the employer will pay towards legal costs
- What happens if you breach the terms of the agreement
Once the settlement agreement is signed by all parties it will be binding.
Will a compensation payment be taxed?
A payment of compensation for termination of employment is generally tax free up to a limit of £30,000. Anything over that sum will be taxed.
However, there are exceptions to this general rule and any entitlements or payments due under the contract of employment are likely to be taxable.
Why get legal advice from a solicitor on a settlement agreement?
If you have been offered a settlement agreement you must seek independent legal advice. Otherwise the document won’t be valid or binding.
Normally, an employer will pay a contribution towards an employee’s legal costs. That contribution might cover all of the employee’s legal costs so securing specialist legal advice from a solicitor is very easy and often free to the employee.
Qualified Solicitors who are part of a specialist employment team will have advised on many different settlement agreements and will know what pitfalls and drafting problems to look out for.
Settlement Agreement Solicitors
Morrish Solicitors is one of West Yorkshire’s leading Law Firms providing legal services to clients across the region and nationally. We have a team of highly qualified and experienced employment solicitors who offer professional, confidential and clear advice in respect of settlement agreements. Our solicitors will consider the fine print of your proposed agreement and give you detailed advice.
It is a legal requirement for you to take independent legal advice on your settlement agreement before signing. We can help you with:
- Negotiating a settlement agreement with your employer
- Independent legal advice on a drafted settlement agreement
- Offering advice for a fair settlement agreement