You Have Been Offered a Settlement Agreement
A settlement agreement is a legally binding contract that ends your employment and waives your right to bring tribunal claims. You must receive independent legal advice before signing โ and your employer should pay for it.
Quick Answer
A settlement agreement is only legally valid if you have received independent legal advice from a named qualified adviser (usually a solicitor). Your employer will normally pay a fixed contribution towards your legal fees โ typically ยฃ300โยฃ500 plus VAT. You are not obliged to accept; negotiate the terms, including the financial payment, reference, and any restrictive covenants.
Full Explanation
Under the Employment Rights Act 1996, s.203, most statutory employment rights cannot be waived by agreement โ with one important exception: a qualifying settlement agreement (also called a compromise agreement). For a settlement agreement to be binding and effective in waiving your tribunal claims, three conditions must be met: (1) the agreement must be in writing; (2) the employee must have received advice from a relevant independent adviser (normally a qualified solicitor or barrister, a certified trade union official, or a certified advice-centre worker) on the terms and effect of the agreement; and (3) the adviser must be identified in the agreement and must have professional indemnity insurance.
The financial payment in a settlement agreement is typically made up of: notice pay (subject to income tax and NICs unless it relates to statutory minimum notice), a tax-free termination payment (up to ยฃ30,000 under ITEPA 2003, s.403), and any other accrued entitlements such as unpaid wages or holiday pay.
Settlement agreements often include restrictive covenants โ post-termination restrictions preventing you from working for competitors, poaching clients, or soliciting former colleagues. These are only enforceable to the extent they protect a legitimate business interest and are reasonable in scope, duration, and geography. If the restrictions are oppressive, they can be negotiated down or may be unenforceable even once signed.
Your employer should always make a contribution to your legal fees. The standard contribution is ยฃ300โยฃ500 plus VAT, though for complex agreements involving significant payments or intricate restrictive covenants, you may need more advice and should negotiate a higher contribution. If the employer refuses to make any contribution, this is unusual and may suggest the agreement is not being offered in good faith.
Do not sign until you have taken independent legal advice and are satisfied with the terms. You are under no obligation to accept the first offer. A well-prepared response โ particularly if you have a strong underlying claim โ can significantly improve the financial package.
Legal Basis
- ยงEmployment Rights Act 1996, s.203 (qualifying settlement agreements)
- ยงACAS Code of Practice on Settlement Agreements (2013)
- ยงIncome Tax (Earnings and Pensions) Act 2003, s.403 (ยฃ30,000 tax-free termination payment)
- ยงEquality Act 2010, s.147 (for settlement of discrimination claims โ requires a separate qualifying condition)
What To Do
Read the Draft Agreement Carefully
Before contacting a solicitor, read through the full draft. Note: (1) the financial payment and how it is structured; (2) the claims being settled โ is the list too wide? (3) any restrictive covenants; (4) the wording of the reference (if a reference is offered, insist on seeing and agreeing the text); (5) the confidentiality obligations.
Instruct a Solicitor (Paid for by Your Employer)
Your employer's contribution should be confirmed in writing. Find an employment solicitor โ many offer fixed-fee settlement agreement advice. Take the agreement and any accompanying letter or 'protected conversation' documentation to the appointment. The solicitor must sign the adviser certificate in the agreement.
Negotiate the Financial Payment
The initial offer is rarely the final one. Consider: what claims do you have and how strong are they? Have you lost your job? What is the tax position of the payment? Solicitors experienced in this area can advise on realistic compensation ranges and help you negotiate an improved offer.
Negotiate Non-Financial Terms
Pay attention to: (1) the agreed reference โ get the exact wording in writing; (2) restrictive covenants โ push to have unreasonable ones removed or narrowed; (3) garden leave versus notice pay; (4) how the payment will be structured for tax purposes; (5) any announcement to colleagues.
Sign Only When Satisfied
Once you are satisfied โ and your solicitor has advised you and signed the adviser certificate โ sign the agreement. Keep a signed copy. The agreement will specify a payment date; note it and follow up if payment is not made on time.
Important Deadlines
Important Warnings
A settlement agreement is final โ once you sign and return it, you cannot generally bring any of the listed claims at the employment tribunal, even if you later discover facts that would have increased its value.
If your employer is using a 'protected conversation' (ERA 1996 s.111A) to make the offer, that conversation is inadmissible in unfair dismissal proceedings โ but not necessarily in discrimination claims.
Restrictive covenants in settlement agreements remain binding even after you sign; ensure you understand them fully before agreeing.