Settlement Agreements

Settlement Agreements could be on the increase

Due to the impact of Covid-19 on businesses across the UK, some employers are reducing their workforces, and this seems to have led to an increase in employees being offered Settlement Agreements.

What is a Settlement Agreement?

In employment law, a Settlement Agreement is a legal contract and resolution between employer and a current or former employee, which settles a dispute that the employee or employer may have. The employee is signing an agreement that waives or settles all possible claims against their employer for unfair dismissal, breach of contract or discrimination for example. Once signed, it will not be possible to take any claims to an Employment tribunal in the future.


When entering into a Settlement Agreement, an employee would normally agree:

  1. Their employment ends.
  2. They accept a sum of money; and
  3. They agree not to sue for any reason.

Using a Settlement Agreement can avoid any lengthy internal procedures and a costly Employment Tribunal claim in the event of an unfair dismissal or constructive dismissal claim, or similar.

When is a Settlement Agreement used?

A Settlement Agreement may be used whenever the employment relationship stops working. It is most common in the following situations:

  • Redundancy
  • Disciplinary issues
  • Job performance issues
  • Lengthy period of ill health
  • Employee Grievance (e.g. Bullying, discrimination & sexual harassment)
  • A clash of personalities

However, if there are no valid reasons for your employer offering you a Settlement Agreement or it is an attempt to encourage you to retire or if you are pregnant for example, then it is important you understand your rights as an employee and the steps you should take before signing a Settlement Agreement.

Can you be offered a Settlement Agreement after furlough?

Simple answer, yes. Furlough is a short-term alternative to redundancy put in place by the government. But there is no guarantee this will protect jobs longer term.

If your employer ultimately needs to make some employees redundant because of the longer downturn, a Settlement Agreement could be proposed to you.

Are payments from a Settlement Agreement tax-free?

Certain non-contractual termination or compensation payments in a Settlement Agreement can be paid tax-free up to a threshold of £30,000. However, the £30,000 exemption does not apply to all payments in Settlement Agreements and the tax implications of any payment should be considered carefully. There are many things to take into consideration regarding the settlement payment, and it is important that you understand exactly what you are entitled to before agreeing what these will be. These can include, but are not limited to:

  • Notice, Holiday and Benefits.
  • Length of employment.
  • Bonus and Commission payments.
  • Furlough pay (if applicable).
  • Shares and Options.

Do I have to accept the Settlement Agreement offer?

No, if you are not happy with the terms that your employer/former employer has offered to you, you do not have to sign the Settlement Agreement.

If negotiations are unsuccessful and you decide not to sign the Settlement Agreement, you may have grounds to bring a claim against your employer/former employer in an Employment Tribunal. It is important to remember that there are strict time limits for bringing Employment Tribunal claims. This is usually 3 months from the date of termination.

Do I need legal advice about my Settlement Agreement?

In order for a Settlement Agreement to be legally binding, you must obtain independent legal advice on its terms and effects. That legal adviser must be clearly identified in the written agreement and their advice must be covered by insurance.

Settlement Agreements can be the most amicable way for an employer and employee to conclude a dispute without the need for either side to resort to further legal action or an employment tribunal.

It is important that you seek professional legal advice to discuss all of your options and to ensure you understand the legal effects of the Settlement Agreement and the impact on your employment and finances, as once you have signed it, you cannot change your mind.

Settlement Agreement Solicitors and Employment Law

Our specialist employment lawyers in Portsmouth will ensure that you understand fully the effects of the Settlement Agreement and that what is included is acceptable and takes into consideration your best interests.

We realise that legal costs may be of a concern, however, in most cases the cost of legal advice regarding Settlement Agreements will be covered by your employer, but we will discuss all the options available to you so that you are fully aware of any fees and forms of funding available.

If you have an employment law query regarding a settlement or compromise agreement, contact us today on 023 9244 8100 for fast, constructive advice or make an enquiry here.

Please note that this article is not intended as legal or professional advice, it is for general guidance only and updates to the law may have changed since it was published.