Top tips: what to expect in your settlement agreement

Top tips: what to expect in your settlement agreement

If your employer has given you an offer, usually a money payment, in return for you giving up your right to bring a claim against them – they’ve proposed a settlement agreement. It’s important to remember that settlement agreements are voluntary and can be negotiated, but what should you expect to see in your settlement agreement? In the first of our two-part ‘top tips’, we run through some of the most common clauses found in settlement agreements.

Employment ending: termination date and notice

You should expect to see the settlement agreement deal with your final termination date. It should provide for you to receive your usual basic salary and any other contractual benefits up until this date.  Depending on what you agree, you may or may not work during this time and you should also be paid for any accrued holiday that has not yet been taken and any entitlement to a bonus or commission.

The agreement should also deal with your notice period. This is usually done in one of three ways:

  • Payment in lieu of your notice: your employer will pay the number of weeks’ pay equivalent to the notice you are entitled to. You should also expect what is called a post-employment notice pay calculation for HMRC purposes to be included here.
  • Garden leave: you will continue to be paid for the period of your notice, but the employer agrees that you will not be expected to work during this time.
  • Working your notice: you will be paid for the period of your notice and be expected to work during this time.

Any payments made in respect of the above will be subject to tax and national insurance contributions in the same way your usual wages would be.

Settlement payment

If a payment is being made by way of compensation for termination you should expect the settlement agreement to specify the amount, and by when and how the payment will be made. The payment is often subject to and conditional on compliance with the terms of the agreement, meaning any breach of the terms can make some or all of the payment repayable.

The first £30,000 of any compensation element can generally be paid free from tax and national insurance. The agreement may require you to indemnify the employer for any further tax or national insurance which are due to HMRC but have been missed.

Settlement agreements may also include a provision requiring the employer to provide a written or oral reference upon request and can be in an agreed format, which would normally be annexed to the agreement.

Waiver and withdrawal of proceedings

You should expect to agree that the agreement is in full and final settlement of the particular claims listed or annexed to the agreement and agree to waive your statutory and contractual employment rights. It’s quite usual for this to be without any admission of liability on the part of the employer. There are often several claims which are specifically excluded from this list, including:

  • Any claims by you to enforce the agreement.
  • Personal injury claims which you are not aware of and could not reasonably be expected to be aware of at the date of the agreement.
  • Claims in relation to accrued pension entitlements.

Statutory conditions and employee costs

The settlement agreement should state that it complies with the conditions which regulate settlement agreements under the law. These conditions include, among others, that the agreement must be in writing and you must have received legal advice from an independent legal adviser on the terms and effect of the agreement. It’s usual to see the employer agreeing to pay a sum towards your legal costs for receiving advice in relation to or preparing the settlement agreement.

How we can help

Settlement agreements can contain a number of other more complex and specific terms. You will also need to receive independent advice on the settlement agreement for it to be legally enforceable. Brachers employment law team can provide expert advice on your legal rights under the agreement, as well as how to negotiate your settlement offer if you are unhappy with it.

For more guidance keep an eye out for our next article, Top Tips: Negotiating Settlement Agreements.