For you and your family

Settlement Agreements & Negotiated Exits

Settlement Agreements (formerly known as Compromise Agreements) are usually offered to employees where there is an agreed exit from the business involving some form of compensation payment. This might be a redundancy situation or for some other reason, such as following a grievance or allegations of misconduct or poor performance. The employer wants the comfort of knowing that an employee who has been offered compensation to leave will not go on to sue them. The easiest way of doing this is to use a Settlement Agreement. The employer will usually pay for the employee to seek legal advice on the Settlement Agreement because the agreement will only be valid if this is done.

Many Settlement Agreements contain drafting errors that can unfairly impact the employee. The rules around what is and is not tax free are complex: the wording of the Agreement can be crucial in ensuring that employees receive tax free sums when this is the genuine and lawful intention. Our employment lawyers’ specialist expertise ensures that our clients are properly advised about the terms of the agreement and how that impacts the taxation of any compensation payments. Our Settlement Agreement lawyers will negotiate any necessary changes with the minimum of fuss to ensure that your Settlement Agreement is fit for purpose and properly protects your interests.

Where you want to start conversations around an exit yourself, our employment lawyers’ experience of Employment Tribunal claims means that we can give you realistic advice about your options and either equip you with the knowledge you need to get the best deal or negotiate on your behalf, whichever you prefer.

Where possible, we will work within your employer’s contribution to legal fees so that you are not out of pocket. We will tell you exactly what this will cover, and where you want us to carry out additional work (such as negotiation of the deal offered), we will provide the best estimate we can and keep you fully informed about the costs you are likely to incur.

Our employment lawyers are based in our London office but can also see you at our Watford Office.

Contact us on 020 7935 3522, lt@freemanssolicitors.net or using the contact form

FAQs about Settlement Agreements

Why does my employer want to use a Settlement Agreement?

No matter how amicable the exit, your employer will have been advised that any deal struck can’t stop you bringing statutory employment claims in an Employment Tribunal unless it has been negotiated through ACAS (using a COT3 Agreement) or is recorded in a Settlement Agreement on which you have received independent legal advice. If making any payments to you, they are likely to want the comfort that you have signed a binding Settlement Agreement.

When can a Settlement Agreement be used?

Settlement Agreements are used in a variety of situations ranging from redundancy, allegations of poor performance or misconduct to grievances raised by employees about discrimination, bullying, harassment or victimisation.

How should I negotiate a Settlement Agreement?

Like any negotiation, success involves making the deal seem better than the alternative. Tactics will vary from case to case – sometimes it is better to strike a deal yourself, in others it can be appropriate to have a lawyer threaten Employment Tribunal proceedings.

Our employment lawyers can coach you through a negotiation or negotiate with your employer or their legal representative on your behalf. Our experience in these matters means that we can advise you on what is a realistically achievable settlement and enables us to gauge how to move negotiations towards a deal palatable to both parties.

How much should I ask for?

What to ask for to leave by way of Settlement Agreement will depend on your situation, the strengths of any claims you might have in the Employment Tribunal, whether you can fund the legal costs of bringing a claim and your desire to avoid litigation. Our employment lawyers will advise you on your options and discuss whether the deal offered is realistically open to negotiation.

Are Settlement Agreement payments taxable or tax free?

The first £30000 of any compensation for loss of employment is tax free. This doesn’t mean that all payments made under a Settlement Agreement are tax free: money due to you under the Contract of Employment is taxable in the usual way. This applies to any pay owed up to the termination date, any bonus or commission due under the contract, accrued but untaken holiday and,  pay due in lieu of notice. The parties can’t agree to waive taxable payments (or the right to notice) and expect the severance pay to remain tax free.

It is important that HMRC understand that the payments due under the Settlement Agreement are to compensate you for loss of employment rather than for anything else. Additional consideration should be provided for any warranties you are giving (such as confidentiality), either in the form of a mutual warranty, non cash benefit or nominal taxed payment.

Our Settlement Agreement lawyers identify which payments are taxable and which can properly be made tax free, ensuring that the Settlement Agreement is drafted properly to provide consideration for any warranties so as not to place your severance pay at risk.

What does “without prejudice and subject to contract” mean?

Without prejudice communications are designed to resolve a dispute. Parties cannot refer to without prejudice communications in any subsequent litigation. This is so parties feel free to make offers or concessions that might otherwise indicate acceptance of liability. Any negotiations about your Settlement Agreement are likely to be without prejudice.

Subject to contract means just that: the offer is made subject to you agreeing and signing the Settlement Agreement. The offer will not be binding until the Settlement Agreement is signed by both parties and contains a certificate from the legal advisor that they have given advice.

Why have I been asked to sign a confidentiality clause?

Almost all Settlement Agreements contain a clause requiring you to keep the deal confidential, sometimes known as an NDA (Non-Disclosure Agreement). This is because your employer does not want other employees to know the terms of the deal, or even sometimes that a deal has been done. Some Settlement Agreements also seek to keep the circumstances leading up to the termination of your employment confidential. We look carefully at the wording of Confidentiality clauses to identify whether your Settlement Agreement would prevent you discussing your work history with any new prospective employers or employment agencies, and will seek to agree wording that properly protects your ability to look for alternative work.