Settlement Agreement Advice for Employers

An agreement may include an additional termination payment in return for settling the specific claims identified within it. There is no standard figure that applies to every situation. The amount offered will usually reflect the circumstances and terms being negotiated.

The agreement should clearly distinguish between the different payments being made.

These may include outstanding salary, accrued holiday pay, payment in lieu of notice (PILON), bonuses or commission and any benefits due up to an agreed date. Keeping these elements separate is particularly important because their tax treatment may differ.

The settlement agreement needs to identify the specific legal claims that are being settled.

Employers should therefore be cautious about treating broad wording such as an employee waiving “all claims” as sufficient. The agreement should make clear which particular employment claims it covers.

The parties may agree what will be included in an employment reference after the employee leaves. Where this has been negotiated, the wording can be attached to or recorded within the agreement so both sides know what has been agreed.

Confidentiality provisions are sometimes included to cover the terms of the settlement or information surrounding the dispute.

These clauses need careful drafting. They cannot lawfully prevent certain disclosures, including protected whistleblowing or reporting a crime to the police.

The agreement may also specify when company property must be returned. This could include laptops, phones, keys, security passes, vehicles, documents or other equipment belonging to the business.

Depending on the employee's existing contract, there may also be post-termination restrictions or agreed wording around how their departure is communicated.

For a settlement agreement to be legally valid, the employee or worker must receive advice from a relevant independent adviser on the terms and effect of the agreement.

That adviser must meet the statutory requirements and be identified in the agreement. This could include a solicitor or an appropriately certified trade union official.
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The employer should consider obtaining its own legal advice where necessary. Warwick HR can support the HR aspects of the process, but our involvement does not replace the employee's requirement to receive independent advice.

Employees should be given a reasonable opportunity to consider formal written terms and obtain independent advice.

Acas recommends allowing at least 10 calendar days as a general rule, unless the parties agree otherwise.

Trying to rush an employee into making a decision can create additional problems and may affect the protection attached to settlement discussions.

Employers sometimes assume that calling a conversation “without prejudice” automatically makes it protected. That is not always the case.

The without prejudice principle generally applies where there is an existing dispute and the discussion is a genuine attempt to settle it.

There is separate protection for certain pre-termination negotiations under section 111A of the Employment Rights Act 1996, but this protection has limits and does not apply to every type of employment claim.I

t is worth taking advice before opening a settlement conversation if you're unsure how these protections apply to your situation.

It is also important not to assume that the first £30,000 paid under a settlement agreement will automatically be tax-free.

Normal earnings such as outstanding wages, holiday pay, bonuses and payments relating to notice are generally taxed in the usual way. Some qualifying termination payments may fall within the £30,000 Income Tax exemption, depending on what the payment represents.

Where the tax treatment is unclear, appropriate tax or legal advice should be obtained.

Before making an offer, think about the route you would take if the employee declined it.

For example, you might need to continue with performance management or investigate a conduct issue.

Looking at the alternatives gives you a clearer basis for deciding whether a settlement agreement is appropriate and what a fair and reasonable offer might look like.