Frequently Asked Questions
Employment - Settlement Agreements
What is a settlement agreement?
A settlement agreement is a legally binding document in which you accept a payment from your employer in return for giving up your rights to sue it in the Employment Tribunal or Court.
Typically, a settlement agreement will contain clauses covering the following:
- The payments you will receive
- The date your employment will end and if you are bound by any post-termination obligations, for example, whether you can work for a competitor
- The taxable status of your termination payments
- That you have taken advice from a solicitor about the effects of signing the agreement
As an employee, under the terms of the agreement you will receive a termination payment, some of which (if not all) will be tax free and you may also be able to agree a reference that can be given to prospective employers. Most settlement agreements include mutual promises of confidentiality and that neither party will disparage each other.
Your employer enjoys the assurance that you will not a bring a claim against it in the future.
What are the advantages of signing a settlement agreement?
It is a legal requirement that you take advice regarding the settlement agreement, in order for it to be legally binding. By taking advice, you will understand the full extent of the legal rights and claims you are giving up, as well as whether the terms are enough to compensate you for losing your job. Sometimes, settlement agreements are not easy to understand and a solicitor will help you navigate the complex legal jargon they often contain.
Why do I need to see a solicitor?
Ideally, as soon as possible and as far in advance of your termination date as you can. A solicitor can help you to achieve the best possible termination package in light of your current employment dispute, and resolve issues about the proposed terms of your settlement agreement.
While some employers are open to negotiating the termination payment being offered and other terms, others may not. Until the settlement agreement is signed, either party can withdraw from the process.
At what stage should I see a solicitor?
Ex-gratia termination packages are tax free up to £30,000. Any payment over this tax threshold is subject to tax and national insurance deductions.
Any payment you are owed based on your employment contract, for example, holiday pay or a bonus, will be subject to your normal rate of tax and national insurance contributions. Payments in lieu of notice (PILON) may be paid tax free, depending on the terms of your employment contract.
How much of my termination payment will be tax-free?
Usually your employer will contribute towards your legal fees when obtaining legal advice on the terms and effects of signing a Settlement Agreement. Commonly, this contribution is around £500 plus VAT.
However, the final cost will depend on the circumstances of your employment dispute and the legal work required.
How much are the legal fees?