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Newark Larken & Co: Using settlement agreements to resolve employment issues

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Employment relationships can end for many reasons, such as dismissal, personality clashes, and redundancy. Businesses are increasingly using settlements to end an employment relationship, writes Lesley Purveur, of Larken & Co, Newark.

They are a good alternative to having to go through what can be a long drawn-out disciplinary performance, or redundancy process, and the uncertainty of tribunal proceedings.

Lesley Purveur. (41841929)
Lesley Purveur. (41841929)

So, what exactly is a settlement agreement?

In simple terms, it is a legally binding agreement between an employer and employee. It normally results in the employee agreeing to waive their employment rights and not pursue any claims in an employment tribunal or other court. In return, the employee will usually receive a financial settlement, set out in the agreement.

When can a settlement agreement be used?

There are various circumstances where they may be appropriate and are most commonly used to end employment on agreed terms, or to resolve a dispute in the workplace.

The agreement may be proposed by either employer or employee and can be offered at any stage of the employment relationship. They are voluntary on both sides.

Employers should remember that employees enjoy full employment rights up to the date of termination, set out in the agreement.

Requirements of a settlement agreement

To be valid, it must be in writing, relate to a particular complaint, be signed by the parties, and record that the regulating requirements have been satisfied.

The employee must receive independent legal advice on the terms of the agreement, and their effect on their ability to pursue any rights in an employment tribunal.

What should a settlement agreement include?

Not all settlement agreements are identical. Elements common to most could include:

  • The amount of compensation to be paid, which may include payments for redundancy, unpaid wages, bonuses, pay in lieu of notice, and any holiday pay entitlement
  • Any restrictions on the employee’s future employment
  • Confidential matters, such as restrictions from employees telling anyone they have entered into a settlement agreement
  • Agreement that the parties will not make derogatory comments or disparaging remarks about one other
  • Inclusion of an agreed reference and form of wording for announcement to colleagues and clients

When is the compensation paid and are there any tax implications?

Usually sums that are agreed to be paid under a settlement agreement are paid within 28 days of the date of termination, which is set out in the agreement.

Up to £30,000 of genuine compensation can be paid on a tax-free basis in certain circumstances. This will depend on the circumstances and payments that are being offered. An employer will deduct from the payments any income tax and employee national insurance contributions required by law.

Is there a charge for the independent legal advice?

The agreement is likely to include a legal fee contribution towards the cost of an employee’s legal fees. The value may vary, but it is commonly around the £350 plus VAT mark. The contribution can be higher depending on the circumstances.

Any discussions or negotiations between employee and employer in connection with the settlement agreement should be conducted on a without prejudice basis or as part of a protected conversation. This means that in the event that an agreement cannot be reached, those discussions cannot be used as evidence in any employment tribunal or other court proceedings.


Settlement agreements end an employment relationship quickly and quietly. They protect the business because the employee signs away almost all legal rights that they may have against the company and, in return, the business usually gives the employee more money than they would ordinarily be entitled to (this will depend upon the circumstances leading to the settlement agreement). As they offer a clean-break and also avoid time, costs and stress associated with protracted formal complaints or tribunal claims they are regarded as an attractive and sensible commercial option.

On the downside, there are costs associated with the drawing up of the agreement, and the legal fees for the independent advice. This may, however, be a small price to pay in the long term.

Where a settlement is not agreed, ongoing employment relationship can be jeopardised and may have an adverse effect on employment relations in the wider workforce.

With the pandemic having caused strain on many businesses, settlement agreements are on the increase and employees should be cautious. If offered a settlement agreement, it is important to get advice and consider whether any issues of unfair treatment arise before you sign.

For more information, contact Lesley Purveur on 01636 703333 or lesley.purveur@larken.co.uk

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