Settlement Agreements

A Settlement Agreement is a legally binding contract between employer and employee which usually brings the employer and employee relationship to a mutual end. A Settlement Agreement can also be used where the employment is ongoing, but both parties want to settle a disagreement that has risen.

For employers, a Settlement Agreement is a method of settling any potential claims that an employee may have against the employer and secures a 'clean break' for both employer and employee providing a practical and effective solution to the ending of a contract.

Settlement Payments

The Settlement Agreement should provide a breakdown of the payments being agreed and also state whether any are to be paid to the employee free of tax.  

Payments of up to £30,000 compensation can often be paid without tax being deducted, if the payment is being made on an “ex-gratia basis” (that is, it’s a payment you have decided to make rather than one you are legally obliged to make) or as damages to compensate for a breach of contract. However, this can be a tricky area and it’s always advisable to obtain legal advice before committing to making a tax-free payment.

How much should be paid in a Settlement Agreement?

There is no set scale of payments and the amount depends on the individual circumstances of each case. Possible factors to consider are:

  • Service length of the employee
  • The circumstances around why you are offering a Settlement Agreement
  • The potential liability and cost of defending a claim in an Employment Tribunal.

How to Calculate Your Settlement Agreement

Calculating the sum of money you are owed is highly involved and there is a lot to take into consideration. Given the vast amount of details you need to check, we have put together a step-by-step guide that covers everything you need to think about.

Settlement agreement flowchart

Click here to see settlement agreement flowchart


What non-financial terms can be included in a Settlement Agreement?

Often an agreed reference will become part of the Settlement Agreement. A clause in the Settlement Agreement will require the employer, when providing a reference for the employee, to not deviate from the wording of the agreed reference which has been agreed within the Settlement Agreement.

A confidentiality clause will also be included, requiring the employee to keep the terms of the agreement, the payment amount and the reasons for the Settlement Agreement confidential. There is also often a clause preventing the employee from making any derogatory comments about the employer.

The Settlement Agreement will also be clear about what is not included within the agreement, for example the employee does not give up any pension rights they have accrued and is free to pursue a personal injury claim in respect of any injury suffered during their employment, but of which they are currently unaware at the time.

Advantages of Settlement Agreements:

  • Avoids costs of tribunal proceedings
  • Sets out terms agreeable to both employer and employee
  • The employee has the certainty of a settlement sum
  • The employer is protected against employment claims
  • It is customary for an employer to pay the legal costs incurred by the employee, but only if the employee enters into the Settlement Agreement and the employer may limit costs to a specific amount.

At Lawson-West we recommend seeking legal advice should you have a potential claim made against you - to ensure you follow the correct procedures and do not miss anything that is crucial in the process. Claims can be very costly and need to be carefully considered early on.

Our employment team is able to provide the appropriate advice and guidance in relation to Employment Tribunals. We offer no-obligation initial appointments and can meet you at any of our office locations in Market Harborough, Leicester or Wigston. 

Please contact us on Tel: 0116 212 1000 or 01858 445 480, alternatively complete the free Contact Us form hereand we will get in touch as soon as possible.