Knowledge Base

This section contains papers and other materials prepared by Steen & Co Employment Solicitors. Shorter articles on current topics are usually in the news section. This area is where we publish longer articles on various employment law topics

What to look for in a settlement agreement

So, your employer has offered you a settlement agreement …

This guidance has been prepared to provide general advice about settlement agreements. It also sets out the issues you need to be thinking about. It has not been written with your particular circumstances in mind, so is not designed to replace the discussions we will have with you about your specific circumstances, but it provides you with some initial prompts to make you think about the important issues.

A settlement agreement is a legally binding contract entered into between an employer and an employee. It used to be called a compromise agreement and you will sometimes hear that term used. It is one of the ways that an employer can get an employee to sign away their rights to claim against the company in an employment tribunal.

Except for three usually uncontroversial exceptions, when you sign a settlement agreement you are signing away all your claims against your employer or former employer. Once you sign there is no going back, except in really rare cases.

What does accepting the settlement agreement mean?

As well as signing away your rights to claim for any of the matters in the agreement, you will also be accepting all the other terms. These may include requirements to keep matters confidential, to return company property, to agree never to speak badly of the company, to take on responsibility for any tax problems with the agreement and to repay the money if you later sue the company.

The agreement is designed to bring all matters to an end. For example, if you believe that you are still owed a bonus or commission, you cannot assume that that is all going to be sorted out once your employment terminates. You are writing that off unless it is specifically dealt with in the settlement agreement. Similarly, if you have historic complaints about issues in the workplace, then they are going to have to be dealt with as part of the settlement agreement process or forgotten about. Quite simply, once you have signed the settlement agreement there is no going back – it is speak now or forever hold your peace. Quite often settlement agreements expressly state that all grievances that may be outstanding are deemed to have been dealt with, that you won’t bring another grievance, nor an appeal or even a subject access request.

In advance of any discussion you have with your solicitor, it would be helpful if you could think about what you want from the company. You need to think about sums of money that are due to you such as notice pay, outstanding salary and anything else that is due. We will need to know what you have been offered by the company and to make sure that this is dealt with in the agreement.

We also want to work out if you can get more money. We have an informal rule that we have to consider four factors when considering whether any offer you have been given is any good:

1) The fairness or otherwise of the proposed or actual dismissal.

2) The size of the offer already made by the company.

3) How long you think you will take to get another job and what you will earn in that job.

4) The time, cost, stress, and effort of bringing an employment tribunal.

When we put these factors into ‘the mix’ we will know if the offer is a good one, whether we should try to negotiate more or whether you should accept the current offer immediately!

If we are going to negotiate, we will work with you on how best to do so. Simply asking for more money is rarely an effective negotiation technique. We will, therefore, need reasons for asking for more money. We won’t go into the tactics we adopt but will say that if we are going to make a threat to do something, such as to take the company to a tribunal, then we will, as far as the facts permit, ensure that any threat we make is credible, is proportionate and that we communicate the fact that we will actually carry out the threat if we have to. Credibility is a function of how much the threat or promise to take action matches the problem to be solved – there is no point, for example, threatening to take action if you don’t have any chance of a successful claim. Proportionality is about whether the threat or promise to take action matches the size of the problem – in this respect we will advise you on what to ask for. We often say that if we ask for too much, we won’t get it and by doing so we increase the chance of the company taking some other action against you. Conversely, if we ask for too little, we not only send the signal that your case isn’t as strong as we might be making out but, importantly, if the small offer is accepted, we will be left with the realisation that we should have asked for more money.

There is no right answer to the question – how much to ask for? The best answer will be found in discussion between us – you provide your explanation of what has happened and what the company has done in similar situations, and we will provide our experience and legal knowledge. The final factor in regard to a threat is to make sure it is realistic – i.e., that the company thinks we might carry it out. Sometimes we advise clients that, as the company is clearly not understanding the value of their claim, it is a waste of legal costs to spend a long time explaining that value to it. In such a case, it is often best to write only one letter and then call ACAS and/or issue proceedings in an employment tribunal. There is, however, no right answer as to what is the best approach to take.

Most settlement agreements take account of how much you earn when calculating some or all of the payments to be made to you. We may, therefore, need to know your gross and net pay per month or per week – however you are paid. If you receive commissions or bonuses, we need to have details.

If you have shares in the company or share options, we will need to discuss them. We deal with this point later in this note. In addition to shares and options you need to think about every way in which you are connected with the employer. This is because there may be other issues such as directorships, personal guarantees, bank loans etc. The time to get all these things sorted out is before you sign the settlement agreement.

Reference and reason for leaving.

We will need to give some thought as to whether you will require a reference in the future. It is certainly a good idea to get a reference agreed as part of a settlement agreement because you may well need one in the future, and it is sometimes unlikely that your former employer is going to help you unless they are contractually required to do so. You are probably not going to get a reference that sings your praises – it depends upon the circumstances in which you are leaving. However, it is better to get at least a factual reference agreed and in any case such basic references are no more than most employers give and, therefore, expect these days. A factual reference will include your start date, finish date, job title as well as (possibly) a brief summary of duties and responsibilities. Sometimes an employer will go a little further and include any significant achievements during your time with them. It is all a matter of negotiation.

If you have been employed in a FCA or PRA regulated role then we will try to ensure that you get, at the very least, a ‘fit and proper person’ reference. We have dealt with a number of senior management function roles such as SMF 2: Chief Finance Officer (CFO), SMF 4: Chief Risk Officer (CRO) and SMF 5: Head of internal audit. In those cases, we have occasionally managed to append the FCA form or even the ‘Form B - Notice to withdraw an application to perform controlled functions (including senior management functions)’ to the settlement agreement so as to avoid any surprises later.

You will also need to consider the reason for leaving in the settlement agreement. Realistically there are likely to only be three possible reasons: resignation, redundancy and ‘mutual agreement’. If you have a reasonable negotiation position and take the point early enough, you have a chance of getting ‘resignation’ as the reason for leaving. This depends, however, on the experience of the HR manager on the other side. Redundancy is not usually given as the reason for leaving outside genuine redundancy situations. We used to think that ‘mutual agreement’ was a bad reason for leaving but, as it is very commonly used nowadays, it doesn’t carry the stigma it used to have.

Finding alternative employment

There is an important point to make here. Sometimes employees who are leaving know that they are going to be offered a settlement agreement but haven’t yet received it. In the meantime, they start looking for another job and may even be offered one. At that point the individual is feeling quite happy with themselves because they are about to leave one employer, potentially receiving tax-free money, and they have a new job lined up. What could go wrong? The difficulty is that many settlement agreements contain a clause that requires you to guarantee, under pain of not getting the money, that you haven’t already received a job offer and that you aren’t expecting to receive one in the near future. Such a guarantee is called a ‘warranty’.

It is a reasonable clause for a company to impose as no company wants to give a departing employee money to compensate them for the loss of their job, only to find that they immediately start a new one. This note, therefore, serves as a warning. You might be required to sign such a warranty and, if you do and are found to have breached it, you probably won’t get the money. Our advice is that under no circumstance should you put yourself in the position being in breach of a warranty.

If this issue is likely to apply to you then you should talk to us as soon as possible.


One of the requirements of a settlement agreement is that the employee gets independent legal advice, usually from a solicitor. Employers sometimes claim that they will pay all the costs of getting that advice. It is sometimes the case that the costs offered in such an agreement cover the cost of that advice. Sometimes, however, particularly when there is a lot of negotiation, the costs offered are not enough. In some cases, we can negotiate an increase. In some cases, we can move payments around to save tax and thus reduce the cost of the legal advice. The costs of instructing us to advise on your settlement agreement can be a confusing point and it is important that you understand the position from the outset.

Your employer will tell you to see a solicitor and that it will pay but the client/solicitor relationship is still between us and you, it is nothing to do with your employer. We will be acting for you, fighting for your rights and for more money for you if we can. It is important to understand, therefore, that when you instruct a solicitor to deal with your settlement agreement you are responsible for our costs in the same way that you would be if you instructed us to sell your house or to write your will.

In law there is actually no requirement at all for an employer to pay for your legal fees or indeed make any contribution, but employers do so because it has become a standard practice as a way of encouraging the employee to go and get the sign-off that the employer knows they need for the settlement agreement to be valid.

The amount that an employer is prepared to contribute is often a point of dispute as the company’s offer may not be enough. Sometimes clients are writing off claims that arise from complicated circumstances going back months and quite possibly years. On other occasions there might be issues about how much commission or bonus is outstanding that require quite a lot of working out. Obviously, it is important that you get everything you are entitled to get under a settlement agreement. It is also crucial that you do not write off a potentially valuable claim.

Sometimes we are required to put in additional work because the settlement agreement your employer gives you is one they have been using in standard form for some time and which requires us to ask for changes on your behalf. Additionally, many employers have failed to take account of tax changes introduced in April 2018 which require specific declaration in respect of post termination notice pay. We are neither accountants nor tax advisers but nonetheless see agreements which we know may cause difficulties further down the line with HMRC.

This is an important point as all settlement agreements contain a contractual requirement for you to pay back any tax that has not been properly deducted from the payments. That requirement is often expanded to include a requirement to repay any costs, penalties and interest charged to your ex-employer. We will discuss this ‘tax indemnity’ with you as it is an important topic.

What we need you to provide to your solicitor

As far as your settlement agreement is concerned, we need to see any paperwork that relates to the settlement agreement itself and the negotiations that led up to it. We also obviously need any letters, emails, minutes etc. that might relate to any dispute that has led to you being offered a settlement agreement. This might include grievances for example. We will also need to see your contract of employment and any other contractual documentation potentially relevant to the sums of money you are going to get. If you are being made redundant then we would need to know details about how any redundancy payment is worked out.

We have created a checklist of relevant information which we may need. We will send it to you if you ask us to deal with your settlement agreement. Sending this document saves costs as it means all the relevant information is gathered quickly and in one document.

Exceptions to the principle that you are signing away all your rights.

We mentioned at the start that there are three exceptions to the claims you are writing off when signing a settlement agreement. These are claims in respect of personal injury (sometimes a blanket waiver, sometimes just ones you know or ought reasonably to know about at this time) and claims in relation to accrued pension benefits. For most people these are not relevant but let us know if you think they are. The third exception you sometimes see is that the agreement will not exclude claims to enforce the agreement itself. We will check the agreement to see that these three exceptions are included. If you retain any share options or rights to commission or bonus, we will need to ensure that these rights are mentioned in the agreement.

Time Limits

If your matter involves dismissal or discrimination, then it might end up in an employment tribunal. Almost all cases settle well before tribunal. However, you should still think about time limits now. If you have already been dismissed, please tell us immediately. If you haven’t been dismissed, we must still discuss this issue which is why we ask for the proposed dismissal date.

Employment Tribunal claims must be lodged in the tribunal within 3 months minus a day of the dismissal or of the discrimination. The compulsory ACAS pre-action conciliation process can extend the period by up to a month, but ACAS must be contacted during the original period. We should work with the fixed time limit of three months minus a day. The date of the termination of your employment is usually known. If you work during your notice period, then it is the end of that period. However, if you received no notice or a payment in lieu of notice then the start date will be when the company said your employment ended or perhaps the last day you worked. If this is relevant, please work out when you think the time limit started as soon as possible and let us know by email and on the phone and let us both fix the date firmly in our diaries.

Finally, as well as having to use our experience to work out what to ask for, we have to work with you to work out how to get that additional sum. Sometimes it is by an increase in the redundancy payment, sometimes by additional time on the payroll, sometimes more benefits, more holiday pay and often a combination of all of these things.

A list of possible heads for negotiation is as follows:

  • Salary – remaining on the payroll for longer;
  • Pension - getting some aspect of your payment, particularly that pertaining to what would have been your notice period placed in your pension fund.
  • Life Assurance – maintaining this for longer post termination.
  • Private Health – getting the company to agree to maintain this benefit after termination.
  • Mobile phone number– it may be that you want the company to both transfer the phone and its number to you.
  • Holiday pay – an increased amount is often a good way of increasing the settlement.
  • Bonus/Commission - payment of both bonus/ Commission - accrued to date and that which would have been accrued during the notice period.
  • Share options need to be considered - including matters such as any restrictions, options vesting early, what the exercise period is, what the reason for leaving is – clearly it is best to be a ‘good leaver’.

Finally, we will always check the following matters before signing a settlement agreement:

  • Is the tax right, including employee national insurance being correctly dealt with?
  • Is there ‘post employment notice pays’ statement and is that area of the law dealt with correctly?
  • Is there a date for payment of all of the payments?
  • Are any restrictive covenant issues correctly dealt with?
  • Will you be able to access payslips when you have left? – this is an important point – we have lots of experience of clients being able to access their payslips and thus being unable to do their self-assessment returns.

We look forward to advising you on your settlement agreement. Please call or email us to discuss it:@ 01865 784101 or