What You Need to Know Before Signing a Settlement Agreement in the UK

A settlement agreement is a legally binding contract between an employer and an employee, typically used to resolve disputes or end employment on mutually agreed terms. In the UK, these agreements often involve the employee waiving their right to bring claims against the employer in exchange for compensation. Before signing a settlement agreement, it’s crucial to understand its implications fully. This guide outlines key considerations, aligned with UK law and best practices, to help you make an informed decision.

Understand the Purpose and Legal Requirements

A settlement agreement is designed to provide a “clean break” by settling potential disputes, such as unfair dismissal, discrimination, or breach of contract, without resorting to an Employment Tribunal. It is often used in scenarios like redundancy, performance issues, or workplace disputes. For the agreement to be valid, certain conditions (which are set out in section 203(3) of ERA 1996, along with corresponding provisions in other statutes) must be met:

The agreement must be in writing.

The agreement must relate to a “particular complaint” or “particular proceedings”.

You must receive advice from a relevant independent adviser (e.g., a solicitor or certified trade union official) on the terms and their effect, particularly on your ability to pursue tribunal claims AND the agreement must identify the adviser.

The independent adviser must have a current contract of insurance, or professional indemnity insurance, covering the risk of a claim against them by the employee in respect of the advice.

It must state that the conditions regulating settlement agreements under relevant statutory provisions have been satisfied.

If an agreement fails to comply with any of the requirements, it will be invalid. This is so even if the failure is seemingly only technical.

Assess the Terms Carefully

Before signing, review the agreement’s terms with your adviser to ensure they are fair and meet your needs. Key elements to consider include:

Compensation

Amount: Ensure the compensation reflects the value of any claims you’re waiving. Your solicitor can assess whether the offer is reasonable by comparing it to potential tribunal awards, considering factors like your salary, length of service, and the strength of your case.
Tax Treatment: Confirm how payments are taxed. Typically, up to £30,000 of a termination payment can be tax-free, but contractual payments (e.g., notice pay, holiday pay) are taxable. Check that the agreement clarifies tax treatment to avoid unexpected liabilities.
Payment Schedule: Verify when payments will be made (usually within 7–28 days of signing, though this varies). Ensure the agreement specifies clear timelines.

Confidentiality Clauses

Many agreements include confidentiality or non-disclosure clauses (NDAs), restricting you from discussing the agreement’s terms or the circumstances of your departure. Exceptions are usually allowed for immediate family, legal advisers, or HM Revenue & Customs (HMRC). Check that the clause is reasonable and doesn’t overly limit your ability to discuss your experience.
Confidentiality clauses cannot prevent you from making a protected disclosure (whistleblowing) about wrongdoing. Any clause attempting to do so is void.

Restrictive Covenants

Check if the agreement reinforces or waives restrictive covenants from your employment contract (e.g., non-compete clauses). If these could hinder your future employment, discuss waiving them with your solicitor.

Waived Claims

The agreement will list claims you’re agreeing not to pursue, such as unfair dismissal, discrimination, or redundancy rights. Some claims, like those for personal injury (unless known at the time), accrued pension rights, or enforcing the agreement itself, are typically excluded. Ensure these exceptions are included.
Be aware that signing waives your right to bring listed claims, even if you later discover grounds for a stronger case (unless there’s evidence of fraudulent misrepresentation by the employer).

References

Negotiate an agreed reference to support future job applications. Ensure the reference is fair and included in the agreement, as employers may not provide one later unless contractually obliged.

Other Benefits

Confirm how benefits like bonuses, share options, or commissions are handled. Ensure the agreement addresses any outstanding entitlements.
If you’re experiencing work-related stress or health issues, you could request additional support, such as counselling services, as part of the agreement.

Seek Independent Legal Advice

It’s a legal requirement to consult an independent adviser before signing, and this step is critical to protecting your interests. Your Advisor will:

Explain the agreement’s terms and their impact on your rights.
Identify any discrimination or unfair treatment you may not have considered (e.g., under the Equality Act 2010).
Negotiate better terms if the offer is inadequate, such as higher compensation, a better reference, or amended clauses.

Employers often contribute to legal fees, but the amount may not cover extensive negotiations. If additional costs arise, you may need to cover them or request an increased contribution from your employer.

Consider Your Options

You are not obliged to sign the agreement. Weigh the pros and cons carefully:

Accepting the Offer: If the terms are fair, signing provides financial compensation and certainty without the stress and cost of a tribunal. It also avoids repayment of certain benefits (e.g., Universal Credit) that may be reclaimed if you win a tribunal claim.
Declining the Offer: If you don’t sign, you retain your right to pursue claims through an Employment Tribunal, but there’s a strict time limit (usually three months less one day from the date of dismissal or incident). Tribunals can be costly, time-consuming, and uncertain, so discuss the merits of your case with your solicitor.
Negotiation: If the offer is insufficient, your solicitor can negotiate on your behalf. Negotiations are typically conducted on a “without prejudice” basis, meaning they can’t be used in tribunal proceedings if talks fail, unless there’s improper behaviour (e.g., undue pressure).

Take Time to Decide

You should have a reasonable period to consider the agreement, typically at least 10 calendar days, as recommended by Acas (Advisory, Conciliation and Arbitration Service). Employers should not pressure you to sign immediately, as this could be deemed improper behaviour, potentially weakening their position.

Gather relevant documents (e.g., employment contract, payslips, redundancy calculations) to share with your solicitor. If you have a disability or language barrier, inform your employer if you need support to understand the process.

Understand the Consequences of Signing

Once signed by you, your solicitor, and the employer, the agreement becomes legally binding and cannot be changed or cancelled without both parties’ consent. Breaching the agreement (e.g., violating a confidentiality clause) could lead to legal or financial consequences, such as repaying compensation. If the employer breaches the agreement (e.g., fails to pay), you can pursue a breach of contract claim in the county court.

If you’re still employed, you remain bound by your employment contract until the termination date. Avoid starting a new job before this date to comply with your obligations.

Additional Considerations

Redundancy Situations: If the agreement is part of a redundancy, ensure statutory redundancy pay is correctly calculated (use the GOV.UK Statutory Redundancy Calculator) and that the severance payment is reasonable.
Discrimination Claims: If you suspect discrimination (e.g., based on a protected characteristic like disability or pregnancy), your solicitor can advise on whether the offer adequately compensates for potential tribunal awards, which may include damages for injury to feelings.
Collective Issues: If colleagues share similar disputes, a collective approach (e.g., through a trade union) may be more effective than an individual settlement. Consult a union representative if applicable.

Conclusion

Signing a settlement agreement is a significant decision that affects your employment rights and future prospects. By obtaining independent legal advice, carefully reviewing the terms, and considering your options, you can ensure the agreement is fair and in your best interests. Take the time to understand the implications and negotiate where necessary to secure the best possible outcome.

At Employment Law Services (ELS) LTD, we have extensive knowledge and proven experience in drafting and advising on settlement agreements. Whether you need practical advice, representation, or proactive support, our team is here to help.

Click here to book a free, no obligation consultation with one of our employment law specialists, or call us now on 0800 612 4772.