Settlement agreement solicitors

What is a settlement agreement?

A settlement agreement (formerly known as a compromise agreement) is a legally binding agreement between an employer and an employee. Under the terms of the agreement, the employee gives up their rights to bring future claims against their employer.

Usually, the employee will receive a sum of money in return and, at the same time, leave the employment of the employer under terms which are agreed and set out in the settlement agreement.

What are the benefits of a settlement agreement?

A settlement agreement is often a clean, dignified and quick way to end an employment relationship. With many businesses looking to cut costs, we are seeing a significant increase in the use of settlement agreements.

What should be included in a settlement agreement?

Settlement agreements are often lengthy and complex agreements that address a number of issues that arise out of the employment relationship and its termination.

Our settlement agreement solicitors can provide expert advice, either to individuals or employers, on what should be included in a settlement agreement. Below we have set out some key considerations.

The termination date

If the employment is ending, the termination date will need to be agreed and defined in the settlement agreement.

Outstanding salary and holidays

When will any outstanding salary be paid? Will there be a requirement to take holidays during any remaining period of employment?

Benefits

How will any benefits received be dealt with under the settlement agreement? For example, company car, private health insurance.

Notice period/pay

Will there be a requirement to work out the notice period (or part of it), or will termination take place with immediate effect? Will any payment in lieu of notice be payable for the unexpired part of the notice period?

Deductions

Will any deductions be made from the final salary/compensation payment? For example, travel loans or training costs?

Pension

When preparing a settlement agreement it is important to consider what impact the termination of employment will have on pension entitlements. 

Tax

It is important that any payments made under the settlement agreement are structured as tax-efficiently as possible. Outstanding salary, notice pay and holiday pay will be subject to tax and national insurance contributions in the normal way. However, under HMRC rules, the first £30,000 of any compensation payment for loss of employment, inclusive of any statutory redundancy payment, can be paid tax-free. In complex termination arrangements, specialist tax advice may well be needed.

Claims

It is important to make clear what legal claims are being 'signed away' by the settlement agreement. Should any claims be excluded from being ‘settled’ (such as an existing personal injury claim)?

Restrictive covenants

The contract of employment may already contain restrictive covenants, limiting the business activities that may be undertaken for a period of time after termination, and the settlement agreement may well deal with how these will apply moving forwards.

Is the scope of any existing restrictive covenants satisfactory, or is any negotiation required to adapt them? Will any new restrictive covenants be introduced via the settlement agreement? Any new restrictions will need to be carefully considered and may also give rise to tax issues.

Directorships

Will the settlement agreement require resignation from any directorships at the same time as leaving employment? It is important to understand the impact that resigning any directorships will have.

Shareholdings/share options

The settlement agreement should address how any shares will be dealt with: for example, will there be a requirement to sell shares back on the termination of employment? If any share options are held, the 'reason for leaving' outlined in the settlement agreement will also be important because this may well determine what, if any, consideration is due for any share options.

Confidentiality

The settlement agreement may well simply refer to any existing confidentiality provisions in the contract of employment or, alternatively, may seek to introduce new confidentiality provisions. The settlement agreement should make clear what information is confidential and what is not.

Reference

The provision of a good reference is often a contentious issue and may well involve a certain amount of negotiation.

How our settlement agreement solicitors can help you

Settlement agreements require careful, expert handling to achieve an outcome that works for both parties, based on sound legal advice.

A failed settlement agreement helps no one and leaves the door open to legal claims — precisely the outcome both parties would wish to avoid.

We can provide you with advice on all the legal issues which can arise out of a settlement agreement as well as how to progress any negotiations.

Whether you are an employee seeking advice on a settlement agreement you have been given by your employer, or an organisation looking to exit one or more employees, we are very happy to assist. We also have extensive experience of undertaking major, logistically complex settlement agreement exercises involving large numbers of staff. 

We cover the whole of the United Kingdom from our offices in Birmingham, Cardiff, Glasgow, Leeds, Leicester, Liverpool, London, Manchester and Newcastle. We regularly advise employers and employees (particularly senior executives) on settlement agreements.